Asian Currencies Weaken as Dollar Firms Ahead of Key Inflation Data, Central Bank Meetings

Most Asian currencies traded on the back foot Friday as the U.S. dollar held firm near a one-week peak, with traders closely watching for key U.S. inflation data and pivotal central bank meetings next week. The Japanese yen weakened for a second consecutive session, highlighting the broad pressure on regional foreign exchange markets.

Dollar Strengthens on Fed Hike Bets

The U.S. dollar index, which measures the greenback against a basket of major currencies, was steady around 99.10 after gaining 0.3% in the previous session to its highest level since September 7. The dollar's strength was underpinned by rising expectations for a more aggressive Federal Reserve following a report Thursday that U.S. producer prices rose 0.4% in August, in line with forecasts.

Investors are now awaiting the U.S. consumer price index (CPI) report, a critical inflation gauge that will be one of the last major data points before the Fed's policy meeting on September 15-16. According to CME Group's FedWatch tool, markets are pricing in a 71.3% probability of a 25-basis-point rate hike, a notable increase from 61.2% a day earlier. The rise in rate hike bets has also pushed the benchmark 10-year Treasury yield to around 4.97%, approaching the key 5% level and further supporting the dollar.

Yen Slips Despite Hawkish BOJ Signals

The Japanese yen continued to weaken, with the USD/JPY pair trading around 154.34. The dollar has gained 1.2% against the yen this week, though it remains down over 3% in the past month. The yen's slide comes even as domestic data reinforces expectations for policy tightening from the Bank of Japan (BOJ).

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Data released Friday showed Japan's wholesale inflation rose 7.6% year-on-year in August, exceeding economists' expectations. This has solidified the view that the BOJ will raise its policy rate, likely by 25 basis points to 1.25%, at its September 17-18 meeting. However, analysts at DBS noted that the BOJ may signal a flexible and gradual pace of future tightening, which could be tempering the yen's potential gains ahead of the decision.

Regional Currencies Mixed Amid Oil Pressure

Performance across other Asian currencies was mixed as investors weighed domestic factors and the overarching strength of the dollar. A surge in energy prices, with Brent crude extending a six-day rally to $108.96 a barrel, has added another layer of pressure on the currencies of oil-importing nations.

• The Indian rupee faced headwinds from the spike in oil costs, with the USD/INR pair trading around 95.67.
• The Australian dollar was on track for a weekly loss, with the USD/AUD pair up about 0.6%.
• The Chinese yuan and Singapore dollar were broadly flat against the dollar for the week.

Markets are bracing for a data-heavy week across Asia, with inflation and trade figures due from India, key activity data including retail sales and industrial production from China, and trade balance numbers from Japan.