Asia FX Gains as Dollar Reacts Tepidly to Hot CPI Data

Most Asian currencies showed slight gains on Friday, while the dollar retreated from near two-month highs despite recent consumer inflation data reinforcing expectations of a smaller interest rate cut by the Federal Reserve.

However, many regional currencies have experienced losses in recent sessions due to U.S. data indicating that interest rates might remain elevated for an extended period. The South Korean won strengthened even as the Bank of Korea announced an interest rate cut and signaled potential further reductions. Meanwhile, the Chinese yuan increased, with attention focused on anticipated fiscal stimulus measures from the Chinese government.

Dollar Holds Steady Amid Mixed Economic Signals

The dollar index and its futures fell by 1% each in Asian trading, pulling back from a one-month high reached previously. Initially, the dollar gained on a stronger-than-expected consumer price index reading for September, but its gains diminished following a significant rise in weekly jobless claims.

Traders continue to expect a 25 basis point interest rate cut from the Fed in November, with market indicators suggesting an 81.3% probability. However, emerging signs of labor market weakness may lead the Fed to pursue consistent rate cuts in the medium term, even as inflation remains relatively high. Producer price index data is set to be released later on Friday, which may offer further insight into the state of the economy.

Chinese Yuan Gains Ground with Focus on Fiscal Support

The Chinese yuan strengthened slightly, with the USDCNY exchange rate declining by 0.1%. The emphasis was on an upcoming finance ministry briefing where the government is expected to detail fiscal stimulus plans. Analysts predict at least 2 trillion yuan ($283 billion) in fiscal support, primarily aimed at bolstering private consumption.

This briefing follows a prior announcement regarding monetary stimulus measures that largely disappointed investors, who remain skeptical about China’s ability to implement additional fiscal measures due to high debt levels.

South Korean Won Rises Despite Rate Cuts

The South Korean won appreciated on Friday, with the USDKRW exchange rate dropping by 0.2%. This strength occurred even after the Bank of Korea cut rates by 25 basis points to 3.25%, marking its first rate reduction in over four years. The central bank has left open the possibility for further easing as the Korean economy faces slow growth and cooling inflation.

Broader Asian currencies were mostly stable, enduring weekly losses as the dollar aimed for a weekly gain. The Japanese yen steadied at 148.71 yen against the dollar after approaching 150 yen earlier in the week. Additionally, the Australian dollar gained 0.2% after earlier losses, while the Indian rupee remained near record highs exceeding 84 rupees.