Asian currencies traded mixed, while the U.S. dollar held on to its gains near recent highs as markets awaited the Federal Reserve’s interest rate decision later in the day, alongside upcoming policy meetings from the Bank of England and the Bank of Japan later this week.
The U.S. Dollar Index remained broadly steady around 99.59 points, while USD/JPY edged lower to 154.97 after the yen had weakened earlier in the session to a one week low of 155.49. Meanwhile, EUR/USD rose 0.07% to 1.15, while GBP/USD remained near 1.35.
The Bank of England is set to announce its monetary policy decision, with markets leaning toward keeping interest rates unchanged despite a renewed increase in UK inflation. Consumer price inflation accelerated to 3.1% in August from 2.9% in July, while core inflation remained at 2.6% and services inflation stood at 3.4%. Markets currently price roughly a one in three chance of a 25 basis point rate increase this week, while another increase is widely expected by the end of the year.
The European Central Bank, meanwhile, has taken a different path, raising all three of its key interest rates by 25 basis points and lifting the deposit rate to 2.50% as renewed inflationary pressures linked to the conflict in the Middle East added to concerns over price growth.
The dollar gained additional momentum in recent sessions as expectations increased that the Federal Reserve could resume its interest rate hiking cycle. Inflation pressures have intensified following the sharp rise in energy prices linked to regional tensions. The latest rally in oil prices has also pushed Treasury yields higher and complicated the inflation outlook, particularly for economies that rely heavily on imported energy.
Analysts at ANZ noted that when the Federal Reserve enters a tightening cycle, it has historically tended to raise rates at consecutive meetings. That remains an important consideration for markets, even though the October monetary policy meeting falls close to the U.S. midterm elections.
In Asia, the Japanese yen weakened to around 155.34 against the dollar after touching a one week low of 155.43 during Asian trading. Despite the latest pullback, the yen remains within its strongest upward trend in months, supported by a shift toward more hawkish expectations for Japanese interest rates, coordinated intervention involving Japan and the United States, and signs that Japanese investors are repatriating funds held overseas.
Markets are pricing roughly an 80% probability that the Bank of Japan will raise interest rates on Friday, while two increases of 25 basis points each are being priced in by the end of January.
Among other regional currencies, the South Korean won weakened as USD/KRW rose 0.2% to 1,364.73. However, the won remains relatively strong after gaining more than 15% against the dollar since the end of June, supported by capital repatriation and strong earnings from South Korean semiconductor manufacturers.
The Chinese yuan remained resilient, with offshore USD/CNY trading near 6.7104 and the onshore rate around 6.7098. The currency retained much of its recent strength despite the widening gap between China’s relatively low interest rates and higher rates across other major economies.
Elsewhere in Asia, currencies showed mixed performance. USD/SGD rose 0.1% to 1.2732, while USD/INR declined 0.1% to 95.986. USD/MYR dropped sharply to 4.0446, while USD/IDR edged higher to 17,707.7.
With markets awaiting the Federal Reserve decision and the Bank of Japan meeting, movements between the U.S. dollar and Japanese yen remain a key focus for Asian foreign exchange markets.
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