Asian Currencies Face Turbulence Amid Steady Fed Rates and Renewed Tariffs
- admin cys
- Aug 6
- 2 min read
A Report by CYS Global Remit Counterparty Sales & Alliance Unit
Strengthening Dollar and Trade Tensions Weigh on Asian Currencies
This week saw Asian currencies primarily weaken, struggling against a strengthening U.S. dollar, escalating trade tensions with the U.S., and disappointing economic data from China. Despite a momentary boost to the Japanese yen from the Bank of Japan's hawkish tone, the region faced increased market volatility due to the Federal Reserve's cautious approach and former President Donald Trump's latest tariff announcements.
The Federal Reserve kept interest rates unchanged, but the lack of a clear commitment to rate cuts worried markets. Fed Chair Jerome Powell cited uncertainty over inflation driven by Trump's tariffs and robust U.S. labor market conditions as reasons for holding steady. Consequently, the dollar index reached a two-month high, poised for a 2.4% weekly gain, its best performance this year, putting pressure on most Asian currencies as investors anticipated prolonged high U.S. interest rates.
Concerned over U.S. trade policies, Asian FX markets were jittery, especially with Trump's executive order imposing new tariffs on India, South Korea, and other major economies in the region. This reignited fears of protectionism, raising doubts about global growth and inflation trajectories, key factors for central banks.
Japanese Yen's Temporary Resilience
The yen was a standout mid-week when the BOJ kept rates steady but unexpectedly issued a hawkish outlook, raising its GDP and CPI forecasts. This signaled confidence in Japan’s recovery, briefly strengthening the yen as USDJPY dropped 0.5%. However, political uncertainty in Japan led to tempered expectations for further rate hikes, stabilizing the yen near its four-month low.
Chinese Yuan Under Pressure as Economy Slows
The Chinese yuan faced pressure amidst declining economic activity. The PMI readings showed contraction in both manufacturing and services sectors, exacerbated by adverse weather and weak consumer spending. Following the release of weaker-than-expected data, concerns grew over the sustainability of China’s post-COVID recovery, as the USDCNY pair rose slightly.
Though Beijing hinted at more stimulus, a lack of concrete measures tempered market optimism. Investors await upcoming economic data, which may influence policy directions in China and the region.
Impact on Southeast and South Asian Currencies
The Indian rupee and South Korean won were hit hard by Trump's tariffs. India faces a 25% import levy, pushing the USDINR close to record lows, while existing strains from high oil prices and inflation persist. South Korea’s 15% tariff under a revised U.S. deal added to the won's pressures, compounded by domestic tax raise proposals. |
The Singapore dollar experienced minor midweek losses but maintained relative stability, while the Australian dollar ended lower, reflecting China's slowing momentum.
U.S. Labor Data and Future Fed Signals
With geopolitical risks rising, focus shifts to U.S. labor market data, particularly the July nonfarm payroll report. Strong job growth could reinforce the Fed's current stance, maintaining dollar strength.
A robust U.S. NFP print could further strain Asian currencies, particularly those struggling with external imbalances or uncertain policies.
Conclusion
Asian FX markets face a complex scenario—torn between a firm Fed, renewed trade tensions, and weakening Chinese economic indicators. Despite the BOJ's hawkish hints and China's potential stimulus measures, sentiment shifts remain unlikely until clearer signals emerge from the Fed and detailed Chinese plans are revealed. With trade protectionism resurfacing, regional currencies must brace for continued volatility.
Source:
