Asian Currencies Range-Bound as Geopolitical Risk Offsets Softer Dollar

Most Asian currencies were little changed on Thursday, caught between a weaker U.S. dollar and rising geopolitical tensions that curbed investor appetite for regional assets. The dollar's decline, driven by soft U.S. inflation data, was offset by caution stemming from ongoing military actions in the Middle East.

Dollar Weakness Tempered by Risk Aversion

The U.S. dollar remained on the defensive after recent data showed a cooling in both consumer and producer inflation, reinforcing market expectations that the Federal Reserve will likely hold interest rates steady this month. The US Dollar Index held near 100.5, close to its lowest level in almost a month.

However, this dollar weakness failed to spark a broad rally in Asian currencies due to persistent risk aversion. According to reports, the United States conducted a fifth day of strikes on Iranian military targets, while Tehran reiterated its stance on the strategic Strait of Hormuz, stoking fears of potential disruptions to global energy supplies and prompting investors to avoid riskier positions.

Regional Currencies React to Local Factors

Several key Asian currencies were driven by domestic developments:

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• South Korean Won: The won was subdued even after the Bank of Korea (BOK) delivered its first interest rate increase in three-and-a-half years. The BOK raised its benchmark rate by 25 basis points to 2.75% and signaled further tightening could be necessary. The widely expected move provided limited support, with the currency weighed down by foreign outflows from technology stocks and broader geopolitical uncertainty. The USD/KRW pair was little changed around 1,485.
• Chinese Yuan: The yuan showed little reaction to the softer dollar. The USD/CNY pair held steady near 6.77, even after the People's Bank of China (PBOC) set its daily midpoint at the strongest level since April. This muted response followed data showing China's economy grew 4.3% year-on-year in the second quarter, missing expectations and marking its weakest pace in over three years.

PBOC Deputy Governor Zou Lan also commented that the central bank prefers a more flexible, market-driven yuan with two-way fluctuations, signaling little appetite to engineer a sustained appreciation.

Yen Remains on Intervention Watch

The Japanese yen continued to be a focus for traders, with the USD/JPY pair edging lower to around 162.1. Market participants remain on alert for potential government intervention to support the currency, which is trading near multi-decade lows.

Recent speculation was fueled by comments from Finance Minister Satsuki Katayama regarding potential reviews of the Government Pension Investment Fund's asset allocations, which some investors interpret as a sign of official discomfort with the yen's weakness.