Asian FX fall, dollar strengthens ahead of U.S. inflation data

Investing.com – Most Asian currencies fell on Monday, while the dollar held steady near three-week highs as stronger-than-expected U.S. nonfarm payrolls data showed traders tempered expectations that the Federal Reserve will cut interest rates soon.

Upcoming U.S. employment and inflation data are in focus as markets look for more signals on when the central bank might start cutting interest rates this year.

Regional currencies fell sharply following Friday’s data and failed to regain momentum on Monday as traders focused on a slew of inflation data from major Asian economies this week.

Dollar strengthens; inflation expectations

Both edged higher in Asian trading on Monday and remained on track to hit three-week highs.

The U.S. dollar rose strongly in the first week of 2024 as traders became increasingly uncertain about when the Federal Reserve would begin cutting interest rates. That became even more apparent when stronger-than-expected data came out on Friday, with a strengthening labor market giving the central bank more room to keep interest rates higher for longer.

It showed traders see a near 63% chance of a 25 basis point rate cut in March, down from 74% last week.

U.S. consumer price index (CPI) data for December will be released on Thursday, and inflation is expected to rise, which does not bode well for expectations of an early interest rate cut.

Yen hit hard on doubts about Bank of Japan

Trading volumes in Asia were somewhat affected by Japan’s holiday on Monday. Copper rose 0.1% after falling almost as low as $145 on Friday.

The yen also recorded its worst weekly decline since late 2022 after an earthquake struck central Japan. Expectations that post-disaster stimulus and reconstruction efforts could delay the Bank of Japan’s plans to begin tightening ultra-loose policies have weighed heavily on the yen.

The focus now is December, which is usually a barometer of Japan’s national inflation.

Asia FX faces inflation challenge

Asian currencies edged lower on Monday, extending losses from the previous session. Regional markets are also preparing to receive a series of important inflation indicators this week.

Mitigating measures, November data will be released on Wednesday.

The dong fell 0.2% as sentiment on China remained weak despite a stronger-than-expected adjustment to the People’s Bank of China’s daily reference rate. Reports from the country are due this Friday and are expected to show China remains deflationary through December.

China will also announce on Friday.

Copper prices rose 0.1% with December data also released on Friday. The central bank’s intervention in foreign exchange markets helped the rupee recover from near record lows last week.

Among other Asian currencies, copper prices and copper prices both fell 0.1%.

While regional currencies strengthened in December on expectations of an early interest rate cut, they ended 2023 largely unchanged under pressure from high U.S. interest rates. This trend is expected to continue until early 2024.