Asian Currencies Flat as Geopolitical Risks Offset Softer Dollar; Yen Nears 40-Year Low

Asian currencies showed little movement on Friday, caught between a softening U.S. dollar and rising geopolitical tensions in the Middle East that bolstered safe-haven demand. While weaker-than-expected U.S. inflation data had recently weighed on the dollar, renewed hostilities between the United States and Iran curbed investor appetite for riskier assets.

Geopolitical Risks Counteract Dollar Weakness

The U.S. Dollar Index, which measures the greenback against a basket of currencies, was poised for a modest weekly decline after recent data tempered expectations for another near-term Federal Reserve rate hike. The index stabilized around 100.79, up slightly on the day.

However, this softness was offset by increased demand for the dollar as a safe haven. Escalating military strikes between Washington and Tehran kept oil prices near one-month highs, fueling concerns that higher energy costs could complicate the global inflation outlook and support the U.S. currency.

Yen Hovers Near 40-Year Low

The Japanese yen remained under significant pressure, with the USD/JPY pair trading around 162.4. This level is just shy of the four-decade low of 162.84 reached earlier in the month, keeping markets on high alert for currency intervention.

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Japanese Finance Minister Satsuki Katayama reiterated that authorities are prepared to respond to "excessive currency moves." This follows a record ¥11.73 trillion spent supporting the yen between late April and late May. The yen's weakness is primarily driven by the wide interest-rate differential between the U.S. and Japan, a gap that investors believe cannot be closed by intervention or portfolio adjustments alone.

Mixed Moves Across Other Asian Markets

Performance was varied across other regional currencies as investors digested local economic data and monitored the broader market sentiment.

• The Chinese yuan retreated slightly from a one-month high but was still on track for its third consecutive weekly gain. Markets are looking ahead to next week's loan prime rate decision from the People's Bank of China.
• The Malaysian ringgit weakened, with the USD/MYR pair rising about 0.3%. The move came after Malaysia’s annual inflation slowed to 1.9% in June, reinforcing expectations that its central bank has room to keep monetary policy unchanged.
• The Singapore dollar was little changed after the city-state reported a narrower trade surplus, while the South Korean won edged higher in offshore trading during a domestic public holiday.