Asian currencies held firm Thursday against a dollar hit by weaker-than-expected U.S. inflation, except for the yen which remained tight ahead of a Bank of Japan meeting and as U.S. policymakers signaled that rates would remain high for some time to come.
Overnight, the euro rose 0.6% and broke above its 200-day moving average, last buying at $1.0811. The Australian dollar rose 0.9% to $0.6662 and the New Zealand dollar jumped five months above $0.62 before settling at $0.6183. The yen rose, but only by about 0.2%.
The gains were larger immediately after the release of the U.S. inflation report, which showed consumer prices remained flat month-over-month in May as the market rose. expected an increase of 0.1%.
They were reduced when the Federal Reserve kept the funds rate at 5.25-5.5% and policymakers’ median projection for the number of cuts this year fell to just one, from three in March.
Sterling rose 0.5% overnight to $1.2798. Morning moves were modest in Asian trading, although battered currencies such as the Indonesian rupiah were likely poised for some relief.
Despite the Fed’s projections, markets continued to price in nearly two 25 basis point rate cuts this year.
“I think markets see the US dollar as weakening, with swings in between,” said Imre Speizer, a strategist at Westpac in Auckland. “This is due (mainly) to the Fed’s rate cuts, which are still planned for this year.
The Chinese yuan was steady at 7.2627 in early offshore trading, after gaining slightly against the dollar overnight.
Fed Chairman Jerome Powell struck a familiar tone during his news conference and emphasized that policymakers would be sensitive to economic data. Although fewer reductions were planned for this year, policymakers had planned them for 2025 or 2026.
“While the view on the rate cut is more optimistic than in March, we think the details moderate that optimism,” said John Velis, Americas macro strategist at BNY, noting that 8 of 19 rate projections Policymakers planned two reductions this year.
Still, that’s no comfort to the yen, which is struggling against the downward trend when the gap is so wide between near-zero Japanese rates and much higher short-term U.S. rates.
The Bank of Japan wraps up a two-day monetary policy meeting on Friday and markets are expecting an announcement or signal that the bank will reduce its massive bond purchases to allow for further rises in Japanese yields.
The yen is therefore likely to be disappointed. The yen remained volatile at 156.82 against the dollar and behind currencies – where it hit a 17-year low of 97.06 per kiwi and a 16-year low of 200 .91 against the pound sterling.
“We expect the BOJ to fail to meet these expectations, which could push Japanese interest rates and the yen lower,” said Kristina Clifton, senior currency strategist at the Commonwealth Bank of Australia.
“Communications from BOJ officials suggest that it wants to take its time to adjust its policy parameters again.
