Major Asian currencies retreated on Thursday as the U.S. dollar firmed, driven by a mix of safe-haven flows linked to uncertainty over U.S.-Iran negotiations and a market increasingly sceptical that the Federal Reserve will cut interest rates this year.
The dollar index and dollar index futures each climbed roughly 0.1% in Asian trade, reaching their highest levels since April 10. The rise reflected investor concern after potential talks between Washington and Tehran faltered this week, reducing confidence that a diplomatic path will ease tensions in the Middle East.
Traders cited heightened anxiety over the status of any future negotiations between the two governments. Both sides remained at odds over activity in the Strait of Hormuz and a U.S. naval blockade of Iran, and an extension of a ceasefire did little to calm market nerves. Those risk-driven flows supported demand for the greenback as a safe-haven currency.
The dollar was further bolstered by growing market conviction that the Fed will refrain from cutting rates in 2024. In testimony to lawmakers, Kevin Warsh, who was nominated by former President Trump for the Fed chair role, said he had not pledged to cut interest rates and stressed the central bank's independence. Mr. Warsh is regarded as a less dovish option, having advocated balance sheet reduction in the past. Separately, a Reuters poll this week indicated investors expect the Fed to wait at least six months before easing policy.
Market participants will be watching U.S. weekly initial jobless claims and purchasing managers index readings on Thursday for additional signals on the health of the world’s largest economy and potential implications for Fed policy.
In Asian foreign exchange markets, most currencies weakened against the stronger greenback. The Japanese yen stood apart from the regional trend. USD/JPY traded near 159.53 as market attention turned to next week’s Bank of Japan meeting.
A Reuters report suggested the BOJ will likely keep policy rates unchanged at its upcoming meeting, but indicate a readiness to raise rates later in the year if necessary. That prospective shift in guidance was driven in part by concerns over energy-driven inflation linked to the Iran conflict. The yen received some support from stronger-than-expected April PMI data, which showed manufacturing activity expanding sharply despite disruptions related to the tensions in the Middle East.
Elsewhere in Asia, the South Korean won weakened as USD/KRW rose about 0.2%. The won saw limited support from stronger-than-expected first-quarter GDP figures, which showed the economy grew robustly on the back of semiconductor export strength. However, growth in other sectors lagged and private spending remained muted, limiting broader currency appreciation.
The Singapore dollar traded weaker as USD/SGD rose 0.1%, while the Chinese yuan was little changed with USD/CNY effectively flat. The Indian rupee slid, with USD/INR up roughly 0.2%, pushing the rupee back above the 94 level. The rupee's steady weakening followed the Reserve Bank of India relaxing some measures aimed at supporting the currency earlier in the week.
Finally, the Australian dollar edged lower with AUD/USD down about 0.1%, even after PMI releases showed improvements in both manufacturing and services activity in April.
Summary
Safe-haven demand linked to an uncertain diplomatic path between the U.S. and Iran, together with rising confidence that the Fed will hold rates steady for longer, supported the U.S. dollar and pressured most Asian currencies. The yen diverged as market expectations built for the BOJ to hold next week but signal possible future tightening in response to energy-driven price pressures.