Investing.com– Most Asian currencies rose slightly on Wednesday, while the dollar hovered near three-week lows as soft U.S. inflation reading spurred increased bets that the Fed will pause its rate hike cycle later in the day.
The dollar weakened further in Asian trade after steep losses on Tuesday, as data showed U.S. eased as expected in May. This fueled, and also boosted appetite for risk-driven assets, which weighed on the dollar.
The and both fell 0.1%, while most Asian currencies logged strong overnight gains.
But further gains in regional currencies were limited, as markets still fretted over any hawkish surprises from the Fed.
The rose 0.2%, while the fell 0.6% after rallying to four-month highs on Tuesday.
The added 0.1%, while the was flat ahead of data due later in the day. Data released earlier in the week showed a bigger-than-expected drop in .
Chinese yuan sees some relief, but more rate cuts expected
Expectations of a Fed pause helped the recover slightly from six-month lows.
But the currency remained under pressure from growing expectations for more rate cuts in China, after the People’s Bank of China (PBOC) trimmed a short-term lending rate on Tuesday.
The move comes as the Chinese government struggles to shore up a slowing economic rebound, amid weak manufacturing activity and persistent deflation.
Markets are now pricing in potential cuts in the PBOC’s Medium-term lending rate, and its benchmark (LPR) later in June.
More rate cuts bode poorly for the yuan as the gap between local and international interest rates widen, with the LPR already in record-low territory. A string of weak daily midpoint fixes by the PBOC also pressured the Chinese currency.
China’s first rate cut in 10 months brewed renewed concerns over an economic recovery in the country, which appears to have run out of steam after a strong first quarter.
Fed pause in focus, but Asia FX outlook glum
While a bulk of traders expect the Fed to keep rates on hold later in the day, markets remained wary of any hawkish surprises, given that U.S. inflation was still trending well above the central bank’s target range.
Even if the Fed pauses, U.S. rates are expected to remain higher for longer, limiting any major upside for Asian currencies.
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