Dollar Holds Two-Month High on Rate Hike Bets, Pressuring Asian Currencies

Most Asian currencies showed a mixed performance on Thursday as the U.S. dollar held firm near a two-month high, supported by renewed expectations for Federal Reserve policy tightening. Stronger-than-expected U.S. economic indicators and rising oil prices have revived inflation concerns, bolstering the greenback against its regional peers.

Dollar Strength Fueled by Inflation and Yields

The U.S. dollar index, which measures the currency against a basket of peers, traded around 101.09. Its strength was underpinned by a robust U.S. manufacturing reading that stoked worries about persistent inflation. These concerns were amplified by a poorly received $70 billion auction of five-year Treasury notes, which pushed the corresponding yield above 5% for the first time since 2007.

Adding to the hawkish sentiment, Fed Governor Michael Barr noted that a strong economy and rising inflation risks could necessitate further rate increases. According to the CME FedWatch tool, market pricing now implies an almost 70% probability of a rate hike in October, a significant jump from about 50% a week prior. Surging energy costs, with Brent crude settling around $103 a barrel, further contributed to the inflationary outlook.

Yen Remains Weak Despite Surging Bond Yields

Returning from a holiday, the Japanese yen steadied but remained near a three-week low, with the USD/JPY pair trading at 157.94. The yen's weakness persisted even as the 10-year Japanese government bond yield climbed to 3.06%, its highest level in three decades.

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Investors reportedly assessed that the Bank of Japan's recent interest rate hike, its first in years, was not accompanied by a sufficiently strong signal of further tightening. This has kept the wide interest rate differential between the U.S. and Japan in focus, weighing on the yen and keeping traders alert for potential currency intervention by Japanese authorities.

Performance Across Other Asian Markets

Other regional currencies displayed varied reactions to the dollar's dominance. The South Korean won and Indonesian rupiah were among the notable decliners, while the Indian rupee showed slight firmness.

• South Korean Won (KRW): The USD/KRW pair rose 0.5% to 1,372.1, though activity was limited as local markets were closed for the Chuseok holiday.
• Indonesian Rupiah (IDR): The USD/IDR pair gained 0.6% to 17,903.5. The move came after Bank Indonesia held its benchmark rate at 5.75% on Wednesday, pledging to continue using exchange-rate stabilization measures.
• Chinese Yuan (CNY): The onshore yuan was slightly weaker, with the USD/CNY pair up 0.1% at 6.71, as markets awaited developments from upcoming U.S.-China trade negotiations.
• Indian Rupee (INR): The rupee was marginally stronger, with the USD/INR pair down 0.02% at 95.915, supported by the central bank's efforts to drain excess liquidity from the banking system.