Weak job openings and consumer confidence data saw the dollar pull back sharply from a near three-month high on Tuesday, as markets bet that the Federal Reserve will have limited economic headroom to keep raising interest rates.
But a string of U.S. and Chinese economic readings are due in the coming weeks, keeping traders largely averse to making big bets ahead of more cues on the world’s largest economies.
This notion weighed particularly on risk-heavy Asian currencies, with most regional units slipping back into negative territory on Wednesday. The Chinese yuan fell 0.2% ahead of key purchasing managers’ index (PMI) data on Thursday, while the Japanese yen shed 0.2% with retail sales and industrial production readings on tap.
Bank of Japan board member Naoki Tamura said that the bank could consider ending its ultra-dovish policy by early-2024, given that inflation has remained comfortably above its target range for nearly a year. Such a scenario bodes well for the yen, which was trading near nine-month lows on a widening gulf between local and U.S. interest rates.
The Singapore dollar fell 0.1%, while the Indian rupee fell 0.2%, with a reading on Indian economic growth due on Thursday. The South Korean won also lost 0.2%, with industrial production data due on Thursday.
The Australian dollar was among the worst performers in Asia on Wednesday, falling as much as 0.5% after consumer price index (CPI) inflation data read weaker than expected for July.
Easing inflation gives the Reserve Bank of Australia (RBA) less impetus to keep raising interest rates, which in turn makes the Aussie appear less attractive. The bank hiked rates by a cumulative 400 basis points over the past year, as it moved to curb sticky inflation.
Other economic readings also showed that Australia’s economy was cooling along with inflation, with building approvals down more than expected in July.
The dollar index and dollar index futures rose 0.1% each in Asian trade, recovering marginally from a 0.5% tumble in the prior session.
More U.S. economic data is on tap this week, with a revised reading on second quarter economic growth due later on Wednesday. Personal consumption expenditures (PCE), the Fed’s preferred inflation gauge, is due on Thursday, while August nonfarm payrolls data is due on Friday.
Any signs of cooling U.S. inflation and labor activity points to the Fed having less headroom to keep raising interest rates. But given that the bank is expected to keep rates higher for longer, Asian currencies are expected to see little relief in the near-term.
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