Asian currencies traded mixed as the U.S. dollar edged lower while remaining close to a two month high, while the Japanese yen extended its recovery ahead of key U.S. inflation and labor market data.
The dollar has recently found support from elevated U.S. yields and expectations of further monetary tightening by the Federal Reserve, although cautious comments from a senior policymaker reduced some expectations for additional interest rate increases. The U.S. Dollar Index stood near 101.22 points, down 0.2%, while USD JPY fell 0.3% to 156.77, extending the yen recovery from its recent weakness. EUR USD edged higher to 1.1354, while GBP USD gained 0.4% to 1.3278.
The dollar remains on course for its strongest monthly performance since June after renewed Federal Reserve focus on controlling inflation pushed interest rate expectations and Treasury yields higher. The U.S. currency has gained around 2% against the yen this month and nearly 3.8% during the third quarter.
Recent gains have made the yen the strongest performing G10 currency as Japanese officials stepped up warnings over excessive weakness in the currency. Japan top currency official Atsushi Mimura told Reuters that Prime Minister Sanae Takaichi and Finance Minister Satsuki Katayama, together with the United States, had delivered a clear warning over yen weakness. Weaker than expected August retail sales and an unexpected decline in industrial production may reduce expectations for faster monetary tightening by the Bank of Japan, although the risk of government intervention remains an important source of support for the yen. Minutes from the Bank of Japan July meeting also showed policymakers believed underlying inflation was moving closer to the 2% target and that further rate increases remained appropriate as long as financial conditions stayed accommodative.
The Australian dollar fell 0.3% against the U.S. dollar to around 0.69, slipping below 0.70 for the first time since early August and reaching a nine week low. Australian inflation data for August came in slightly weaker than expected, putting pressure on the currency and reducing expectations for another near term rate increase from the Reserve Bank of Australia, even though annual and underlying inflation remain well above target. The decline came one day after the RBA raised its official cash rate by 25 basis points to 4.60%, its highest level since 2011, while warning that inflation risks had materialized and further monetary tightening could still be required. The fall in the Australian dollar despite the rate increase reflects how much tightening had already been priced into markets, while expectations of higher U.S. rates, elevated Treasury yields, and weaker risk appetite reduced the appeal of higher Australian interest rates.
Attention across dollar and Chinese yuan markets is now focused on upcoming U.S. economic data. The Federal Reserve preferred core Personal Consumption Expenditures inflation measure is due next, while the nonfarm payrolls report scheduled for Friday represents the next major test for the dollar and interest rate expectations. New York Fed President John Williams said there was no urgent need for another rate increase, pushing market expectations for an October hike down to around 50% from about 71% previously.
The Chinese yuan remained broadly stable after official data showed China manufacturing Purchasing Managers Index rising to 50.1 in September from 49.8, returning to expansion territory, while the non manufacturing index improved to 50.2. The yuan is on course for a seventh consecutive quarterly gain against the dollar ahead of China National Day holiday. China also warned of a decisive response to potential European Union trade restrictions, describing them as protectionist measures and signaling possible investigations involving Chinese companies and supply chains.
Elsewhere in Asian currency markets, USD KRW rose 0.30% to 1,355.69, USD INR gained 0.05% to 96.138, and USD SGD increased 0.02% to 1.2779, while the New Zealand dollar declined 0.12% to 0.5643.
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