Concerns over China also kept sentiment towards Asian markets largely muted, after the People’s Bank of China held its benchmark loan prime rate at record lows earlier in the session. The central bank has limited headroom to loosen policy further, as it struggles to strike a balance between supporting an economic recovery and preventing more yuan weakness.
The yuan moved little in onshore trade, while the offshore yuan crossed the 7.2 level to the dollar.
The dollar was hit with some profit-taking after a strong start to the year, with the outlook for the greenback looking robust as traders began pricing in a greater possibility of higher-for-longer U.S. interest rates. This notion weighed on most Asian currencies over the past few weeks.
The yen was among the worst-hit by expectations of high U.S. rates, but saw some strength on Monday, rising 0.2% from its weakest levels since late-November.
Focus was chiefly on the conclusion of a BOJ meeting on Tuesday, where the central bank is widely expected to maintain negative interest rates and its yield curve control mechanisms.
Analysts expect little changes to the BOJ’s stance, especially amid increased uncertainty over the Japanese economy after a devastating earthquake at the beginning of the year.
Softening inflation and sluggish wage growth is also expected to put little pressure on the BOJ to consider tightening policy.
Beyond the BOJ meeting, focus this week is also on Tokyo consumer inflation for January, which is expected to reflect any inflationary impacts from the new year earthquake.
Broader Asian currencies were muted as they nursed losses from a weak start to the year. The Australian dollar steadied after sinking to a two-month low, while the South Korean won lost 0.2% and remained in sight of a near three-month low. South Korean GDP data for the fourth quarter is also due this Thursday.
The Singapore dollar steadied near two-month lows ahead of key inflation data later this week.
The Indian rupee moved little, with local markets closed for a special holiday to mark the inauguration of a controversial temple in North India. But traders remained on edge over any potential communal violence rising from the inauguration, given that the topic is a major point of contention for Hindu-Muslim relations.
The dollar index and dollar index futures both fell 0.1% in Asian trade, retreating further from recent one-month highs amid profit-taking.
The CME Fedwatch tool showed that markets were now pricing in a greater chance for no changes to U.S. interest rates in March- a drastic reversal from earlier expectations for a cut. Such a scenario bodes well for the dollar.
Focus this week is on more cues from the world’s largest economy, particularly on fourth-quarter GDP which is expected to show cooling growth.
More cues on inflation are also due this week with PCE price index data- which is the Fed’s preferred inflation gauge- due this Friday. Any signs of sticky inflation give the bank more impetus to keep rates higher for longer.
The Fed is widely expected to keep rates steady when it meets next week.
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