Asian currency markets traded with caution on Friday as participants awaited a key U.S. inflation release, and a softer-than-expected inflation reading from Japan added uncertainty over the Bank of Japan's path for additional tightening.
The U.S. Dollar Index inched up about 0.1% after having climbed to a one-month high overnight, supported by safe-haven flows and the impact of this week’s hawkish Federal Reserve minutes. U.S. Dollar Index futures were also around 0.1% firmer by 23:51 ET (04:51 GMT).
Attention in markets was focused on the U.S. personal consumption expenditures (PCE) price index, the Fed’s preferred measure of inflation, which was due later in the day and seen as likely to provide fresh signals for monetary policy direction.
Japan inflation cools; BOJ decision timing questioned
Japanese data released on Friday showed consumer price inflation slowing to a near four-year low in January. The core measure slowed to 2.0% in January, marking a two-year low and matching the Bank of Japan’s stated target. Headline inflation fell to 1.5% in January, dropping below the BOJ’s target for the first time in nearly four years.
Another measure that strips out both fresh food and fuel also slowed, though it remained above the target, a pattern that the data commentary said points to moderating underlying inflation momentum. That softer inflation backdrop reinforced doubts among market participants about when the BOJ might next raise rates.
Separately, data showed Japan’s factory activity expanded at its fastest rate in just over four years in February, a contrast to the cooling consumer price readings.
Regional FX moves and market drivers
Traders balanced regional monetary policy uncertainty with a generally firm dollar. The greenback was on pace to gain more than 1% for the week, marking its strongest weekly showing in months as solid U.S. macro reports and geopolitical tensions, including strains with Iran, supported demand for the currency.
- USD/KRW traded flat on the day.
- USD/SGD ticked up about 0.1%.
- USD/CNH in offshore trading was little changed.
- USD/INR ticked about 0.1% lower.
- AUD/USD edged down roughly 0.3% on Friday.
Against this backdrop, market participants appeared reluctant to make large directional bets ahead of the U.S. PCE release, while digesting the implications of Japan’s softer inflation figures for the BOJ’s policy timetable.
Outlook
Markets are expected to remain attentive to the U.S. inflation print and to any further commentary on tightening from major central banks. The combination of a firmer dollar, an important U.S. inflation report due, and the unexpected cooling in Japan’s consumer prices contributed to the cautious tone across Asian currency markets.