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Asia FX muted, dollar strong as sticky CPI fuels bets on smaller rate cut

Published 12/09/2024, 01:44 pm
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Investing.com-- Most Asian currencies moved in a flat-to-low range on Thursday, while the dollar firmed as a strong reading on U.S. consumer inflation dashed hopes that the Federal Reserve will cut interest rates by a wide margin.

Soft inflation data from Japan weighed on the yen, pulling the currency further off its strongest levels in eight months. But the yen still remained relatively strong as hawkish comments from the Bank of Japan continue to trickle in.

Barring the yen, most regional currencies were also nursing steep losses from the past week, as heightened fears of a U.S. recession battered risk-driven markets. 

Dollar strong after core CPI beats expectations, dents rate cut bets 

The dollar index and dollar index futures both rose 0.1% in Asian trade, extending gains from Wednesday after core consumer price index inflation data read higher than expected for August.

While headline CPI inflation still eased, the core reading suggested that inflation may prove to be stickier than initially expected, necessitating smaller rate cuts from the Fed.

Bets that the central bank will cut rates only by 25 basis points when it meets next week grew substantially after Wednesday’s data, while bets on a 50 bps cut more than halved, CME Fedwatch showed. 

But before next week’s Fed meeting, focus is on producer price index inflation data due later on Thursday, for more cues on inflation. 

The prospect of smaller rate cuts bodes poorly for Asian markets, given that such a scenario heralds tighter U.S. monetary conditions for longer. 

Japanese yen weakens from 8-mth highs after soft PPI 

The Japanese yen retreated from its strongest levels in eight months, with the USDJPY pair rising 0.1% to 142.47 yen. 

The yen extended overnight declines after PPI inflation read softer than expected for August.

The softer inflation print raised some questions about just how much headroom the Bank of Japan has to keep raising interest rates, given that the BOJ signaled that it will raise interest rates higher this year on an increase in inflation. 

BOJ board member Naoki Tamura said on Thursday that the bank needed to raise interest rates to at least 1% to avoid inflationary risks.

The central bank is set to meet next week, with analysts doubtful over another rate hike after an increase in late-July. Consumer inflation data due next week is also set to offer more cues. 

Broader Asian currencies moved in a flat-to-low range, amid uncertainty over U.S. interest rates and a dearth of local cues. 

The Australian dollar’s AUDUSD pair rose 0.1%, while the South Korean won’s USDKRW pair and the Singapore dollar’s USDSGD pair were both flat. 

The Chinese yuan’s USDCNY pair was flat and nursing some losses this week as sentiment towards the country was dented by weak imports data. Reports that U.S. lawmakers were preparing more trade restrictions on Beijing also undermined the yuan.

The Indian rupee’s USDINR pair was flat and hovered close to the 84 rupee level. 

 

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