Asian Currencies Mixed as Traders Weigh Fed Outlook Against Mideast Tensions

Asian currencies showed little clear direction in Tuesday trading, as the U.S. dollar hovered near multi-month lows while rising oil prices and renewed geopolitical tensions in the Middle East limited investor risk appetite.

Dollar Weakens on Shifting Fed Outlook

The U.S. Dollar Index, which measures the greenback against a basket of major currencies, traded flat around 99.65. The dollar's softness follows a series of weaker-than-expected U.S. economic reports, including a drop in July retail sales and mild inflation readings, which have led traders to scale back bets on aggressive Federal Reserve monetary tightening.

Markets are now pricing in just a 35% probability of an interest rate increase at the Fed's September meeting, according to the CME FedWatch Tool. Investors are now awaiting the release of the central bank's meeting minutes on Wednesday for further clues on the path of monetary policy.

Geopolitical Risks and Yields Limit Gains

Despite the dollar's weakness, gains for Asian currencies were capped by several headwinds. Renewed tensions between the U.S. and Iran helped push Brent crude oil prices above $91 a barrel, stoking inflation concerns for energy-importing nations across Asia.

Ad

Adding to the pressure, U.S. Treasury yields have climbed, with the 10-year yield rising above 4.7% and the 30-year yield surpassing 5.3%, its highest level since 2007. Higher U.S. yields tend to draw capital away from emerging markets, weighing on their currencies.

Regional Currency Performance

Performance across the region was mixed, reflecting the conflicting market drivers:

• The Japanese yen remained weak, with the USD/JPY pair rising 0.2% to near 160 yen.
• The onshore Chinese yuan (USD/CNY) edged 0.1% higher, while the South Korean won (USD/KRW) fell 0.2%.
• The Indian rupee faced renewed pressure, with the USD/INR pair rising 0.1% to 95.67. The rupee was impacted by high crude prices and a Reserve Bank of India policy decision, with Reuters reporting the central bank was likely intervening to support the currency.