Asian currencies struggled to find direction on Monday as market participants awaited further updates on the US debt ceiling, while the dollar retreated following Federal Reserve Chair Jerome Powell’s less hawkish outlook than expected. Powell’s comments on Friday about tightening credit conditions in the US alleviated concerns of aggressive interest rate hikes, resulting in significant losses for the dollar, which extended into Asian trading on Monday.
Both the dollar index and dollar index futures declined by approximately 0.2% each as market expectations grew for the Fed to pause its rate hike cycle in June. Fed Fund futures prices indicate an almost 83% probability of a June pause.
However, Asian currencies received little support from the weakening dollar as investor sentiment remained cautious due to fears of a US debt default. President Joe Biden is set to continue discussions with Republican lawmakers this week regarding the debt ceiling.
The Chinese yuan experienced the most significant decline of the day, dropping 0.2% and approaching a near six-month low. Despite Biden’s mention of potential improvement in Sino-US relations and a stronger daily midpoint fix by the People’s Bank of China, the yuan found limited support.
The People’s Bank of China maintained its benchmark loan prime rate at historic lows on Monday. Nevertheless, weak economic data for April raised speculation that the central bank could implement rate cuts as early as June. This uncertain outlook contributed to further pressure on the yuan, aggravated by the growing divergence between local and US interest rates. The breach of the psychologically important 7 level by the yuan last week is expected to lead to additional losses in the currency.
Other Asian currencies displayed mixed performance. The rate-sensitive South Korean won gained 0.6%, benefiting from the less hawkish outlook on the Federal Reserve. Similarly, the Australian dollar rose 0.1%.
The Japanese yen strengthened by 0.2%, also benefiting from the potential pause in US interest rate hikes. However, the currency had recently experienced significant losses as the Bank of Japan signaled no immediate changes to its ultra-dovish monetary policy.
The Japanese economy continued to exhibit weakness, with Monday’s data revealing an unexpected decline in core machinery orders throughout April.
On the other hand, the Thai baht declined by 0.2% due to uncertainty surrounding the formation of a new government following the pro-Democratic opposition’s victory over the military-backed junta in a recent election.
In summary, Asian currencies remained uncertain as markets awaited updates on the US debt ceiling, while the dollar retreated following Powell’s less hawkish comments. The performance of individual currencies varied, with the Chinese yuan facing significant pressure, while other currencies such as the South Korean won and Australian dollar experienced modest gains. The Japanese yen strengthened, but the Thai baht declined amid political uncertainties.