The Japanese yen was an outlier, strengthening sharply on safe haven demand and as the prospect of more interest rate hikes by the Bank of Japan underpinned the currency.
Other units such as the Chinese yuan also appreciated sharply, although this was mostly driven by a substantially stronger-than-expected midpoint fix from the central bank.
Sentiment towards regional markets was battered by a persistent sell-off in risk-driven assets, as a string of weak economic readings from the U.S. drove up concerns over slowing growth and largely offset optimism over lower interest rates.
The Japanese yen was the best performer in Asia on Monday, with the USDJPY pair dropping 1.4% to 144.53 yen- its weakest level since mid-January.
The yen extended recent gains against the dollar after the Bank of Japan last week hiked interest rates and said it planned to raise rates further this year amid some pick-up in inflation and spending.
The minutes of the BOJ’s June meeting, released earlier on Monday, also presented an unexpectedly hawkish stance for the BOJ.
This was coupled with purchasing managers index data that showed a sharp rebound in Japanese service sector activity, which also indicated some resilience in the economy.
The dollar index and dollar index futures fell 0.3% each in Asian trade and hit their lowest level in 4-½ month lows.
The greenback saw little safe haven demand as worsening economic conditions in the U.S. saw traders begin pricing in the potential for an ever greater raft of interest rate cuts by the Federal Reserve.
Traders are now pricing in a 74% chance the Fed will cut rates by 50 basis points in September, compared to prior bets on a 25 bps cut, CME Fedwatch showed.
The central bank is expected to bring rates down by a total 100 basis points this year, amid concerns over slowing economic growth. Such a scenario bodes poorly for the dollar, and portends some strength in Asian currencies.
But weak risk appetite saw most Asian units soften on Monday. The Australian dollar’s AUDUSD pair fell 0.2% before a Reserve Bank meeting on Tuesday, where the central bank is widely expected to keep rates unchanged following recent data that showed inflation was cooling slightly.
The Chinese yuan’s USDCNY pair fell 0.3% to a six-month low, with a bulk of the strength coming from a stronger-than-expected midpoint fix by the PBOC. The central bank was also seen intervening in currency markets in July, as a string of weak readings on China’s economy battered the yuan.
But private PMI data on Monday showed some resilience in the country’s services sector.
South Korean won’s USDKRW pair rose 0.2%, while the Indian rupee’s USDINR pair remained in sight of record highs.
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