Asian foreign exchange markets were largely subdued on Friday, with most regional currencies trading in tight bands as the U.S. dollar steadied after a firm run earlier in the week. The U.S. Dollar Index was little changed at 101.43 after having climbed to its strongest level in over a month, supported by resilient U.S. inflation and hawkish remarks from Federal Reserve officials that helped cement expectations of higher-for-longer U.S. interest rates.
Yen near intervention territory
The USD/JPY rate edged down 0.1% to 161.60 after hovering just below Thursday's 161.95 peak, which was its strongest level since 1986. Market participants remained wary of further short-yen positioning because of the lingering risk of official intervention, even as the currency lingered at multi-decade lows.
Tokyo consumer inflation in June rose broadly in line with expectations. Core CPI accelerated to 1.6% year-on-year, while the measure excluding fresh food and energy increased to 1.1%. The data signalled persistent underlying price pressures but provided little impetus for the Bank of Japan to adopt a markedly tighter policy stance. Market observers said the wide interest-rate differential with the United States continued to weigh on the yen despite the firmer inflation backdrop.
Regional moves and market drivers
Across the region, the Malaysian ringgit led gains as USD/MYR fell 0.4%. South Korea's currency weakened slightly, with USD/KRW up 0.2%, while TWD/USD slipped about 0.1% as most Asian currencies remained range-bound against a broadly firmer dollar.
Indonesia's rupiah eased modestly, with USD/IDR rising 0.23%. Thailand's baht also softened as USD/THB climbed 0.31%, reflecting continued support for the dollar from elevated U.S. yields. The Australian dollar slipped 0.3% to $0.6889 and the New Zealand dollar lost 0.2%, extending weekly declines as investors continued to favour the greenback amid expectations of further Federal Reserve tightening.
The Australian currency remained under pressure after this week's persistently sticky inflation figures and a resilient labour market reinforced expectations that the Reserve Bank of Australia could keep policy restrictive for longer. Market participants remain divided over whether another rate increase will be required.
Outlook
With the dollar having already produced a significant weekly advance, markets are now looking for new cues from upcoming U.S. economic reports and remarks from Federal Reserve officials. Traders noted that Thursday's personal consumption expenditures inflation report largely reinforced expectations that U.S. monetary policy will remain restrictive through the second half of the year.
Against that backdrop, regional currencies are likely to remain sensitive to shifts in U.S. interest-rate expectations, domestic inflation readings and any signs of official currency intervention.