Most Asian currencies registered small gains on Friday after the U.S. dollar retreated a touch from a recent high, but the region remained positioned for weekly losses as geopolitical tensions and a pronounced rally in oil gripped markets.
The U.S. Dollar Index fell about 0.3% in Asian trading hours following an overnight move that had taken it above a three-month peak. Over the week the index was nevertheless on track to record a roughly 1.5% increase. U.S. dollar futures mirrored that intraday move, trading about 0.3% lower as of 00:12 ET (05:12 GMT).
Investor sentiment has been unsettled by an intensifying confrontation involving Iran, Israel and the United States, which by Friday had entered a seventh day with no sign of abating. Market participants have been particularly focused on the potential for disruptions to energy flows through the Strait of Hormuz, a narrow maritime corridor through which about one-fifth of the world’s oil passes. That concern helped drive oil prices substantially higher this week, with traders pricing in a heightened risk of supply interruptions.
The sharp move in crude - which climbed in excess of 15% over the week - has direct implications for many Asian economies, most of which import significant volumes of energy. Higher crude costs can worsen trade balances, feed through to domestic inflation, and exert downward pressure on local currencies as external account dynamics and price pressures shift.
Market moves in individual pairs were mixed. The USD/KRW rate slipped around 0.6% on Friday, though it was on course to rise roughly 2% over the week. The USD/JPY pair traded largely flat in Asian hours and was pacing for a roughly 1% increase on the week. China’s onshore USD/CNY rate inched about 0.2% higher and was also set to post a weekly gain. In Singapore, USD/SGD fell about 0.2% on the day. The AUD/USD pair rose around 0.4% on Friday but was still headed for a weekly decline.
Beyond currency moves, the oil spike has complicated the outlook for global monetary policy. Expectations that the U.S. Federal Reserve could begin trimming interest rates later this year have been scaled back by markets as rising energy costs threaten to push inflation higher again. That recalibration of Fed cutting prospects has, in turn, offered some support to the dollar even as it eased slightly on Friday.
Traders were also awaiting the U.S. February nonfarm payrolls report due later on Friday. The employment data could offer fresh information on labor market strength and influence views on the likely path for monetary policy.
Context limitations: This report reflects market moves and risks described for the current trading period and does not introduce information beyond the developments and figures stated above.