Asian currencies experienced a weakening trend on Tuesday as the dollar soared to over five-month highs. This rise in the dollar was fueled by escalating geopolitical tensions between Iran and Israel, as well as increasing expectations of higher U.S. interest rates. Despite stronger-than-expected Chinese gross domestic product (GDP) data, which initially sparked some optimism towards Asia’s largest economy, other economic indicators painted a more nuanced picture. The Chinese yuan, for example, remained relatively stable on Tuesday, with the USDCNY pair staying above 7.2 even after the GDP data pointed towards better-than-expected growth in the first quarter. However, softer industrial production and retail sales data for March indicated a potential slowdown in the Chinese economy after a brisk start to the year.
The People’s Bank of China’s decision to establish a weak midpoint for the yuan reinforced concerns about the currency’s stability, given the limited room for the central bank to intervene. This move was reflected in the USDCNH pair, which dropped by 0.2% amidst continued selling pressure on the offshore yuan. While monetary stimulus measures are anticipated to bolster the Chinese economy in the near term, they are also likely to exert further downward pressure on the yuan in the coming months.
The dollar index and dollar index futures appreciated by 0.1% each in Asian trading, reaching their highest levels since early-November. This uptick in the greenback was supported by robust U.S. retail sales data for March, which heightened expectations for inflation. The recent data releases, coupled with stronger-than-expected inflation figures from March, led to a revision in market expectations regarding a potential rate cut by the Federal Reserve in June. Attention is now turned towards an upcoming speech by Fed Chair Jerome Powell, where further insights on monetary policy and the state of the U.S. economy are eagerly awaited.
Concerns over prolonged high U.S. interest rates, along with subdued risk appetite amid heightened geopolitical tensions in the Middle East, weighed heavily on Asian currencies. Safe-haven demand for the dollar surged, causing a retreat in risk-sensitive currencies like the Australian dollar. The AUDUSD pair depreciated by 0.4%, reaching a five-month low. Similarly, the South Korean won and Singapore dollar witnessed depreciations against the dollar, with the USDKRW pair rising by 0.9% and the USDSGD pair by 0.3%, respectively. The Indian rupee struggled as well, with the USDINR pair hovering near record highs above 83.5.
The Japanese yen continued its downward trajectory, with the USDJPY pair climbing to a new 34-year peak above 154. Despite warnings from Japanese government officials on speculative forex activities, the yen’s weakness persisted. Market participants remained vigilant for potential government intervention to curb excessive fluctuations in the currency market, a strategy often involving substantial dollar sales to drive down the USDJPY pair.