Asian currencies weakened on Thursday as the dollar rebounded from seven-month lows, driven by bargain buying. However, traders largely maintained a cautious stance towards the greenback amid expectations of upcoming interest rate cuts.
The Japanese yen softened after strong gains earlier in the week, though positive PMI data supported sentiment towards Japan. Broader Asian currencies had gained earlier in the week, bolstered by growing expectations of Federal Reserve interest rate cuts starting in September. However, weak U.S. labor market data released on Wednesday rekindled fears of a recession, dampening risk sentiment.
Dollar Bounces Back from 7-Month Lows; Rate Cuts and Recession Concerns Loom
The Dollar Index and futures both edged up by 0.2% during Asian trading, recovering from three days of significant losses that had pushed the greenback to its lowest point in seven months.
The dollar’s recent weakness was driven by increasing bets on a September rate cut, with the minutes from the Fed’s late-July meeting revealing that most policymakers favored lowering rates. A sharp downward revision in U.S. payrolls data for the year ending March 2024 strengthened the case for rate cuts but also reignited concerns about a potential U.S. recession, given the recent softness in labor market data.
All eyes are now on Fed Chair Jerome Powell’s upcoming speech at the Jackson Hole Symposium on Friday for further insights into the economic outlook.
Yen Stabilizes as Japan’s Services Sector Shows Growth
The Japanese yen dipped slightly on Thursday but retained most of its recent gains as positive economic data fueled expectations of more interest rate hikes by the Bank of Japan. The USD/JPY pair hovered around the mid-145 yen level.
Japan’s services sector showed steady growth for the second month in a row, offsetting a decline in manufacturing activity. Strength in the services sector was driven by increased local demand, as rising wages boosted private consumption. This improvement in economic conditions could lead to higher inflation, potentially prompting further rate hikes from the BOJ.
Upcoming Japanese consumer inflation data, set to be released on Friday, is expected to provide additional insights into the economic outlook.
Broader Asian currencies remained subdued as markets weighed the risks of a U.S. recession against the potential for lower interest rates.
The Chinese yuan’s USD/CNY pair was flat, while the South Korean won’s USD/KRW pair rose 0.2% after the Bank of Korea held interest rates steady and hinted at a possible rate cut later this year.
The Australian dollar’s AUD/USD pair slipped 0.1%, cooling after a recent rally, while the Singapore dollar’s USD/SGD pair edged up 0.1%.
The Indian rupee’s USD/INR pair also rose slightly, staying close to its record high.