Asia FX dips amid Fed uncertainty, dollar set for strong week

Investing.com — Most Asian currencies retreated on Friday, coming under pressure from uncertainty over U.S. monetary policy following mixed economic readings this week, while the dollar stuck to a 10-day high amid dwindling bets on interest rate cuts this year.

Risk-driven assets were set for a tough week following signs of sticky U.S. inflation, as well as slowing growth in China.

The traded at two-month lows after disappointing and data released this week pointed to a slowing economic rebound in Asia’s largest economy. The readings, which came in the wake of a surprise contraction in China’s , drummed up expectations of more policy loosening by Beijing.

This put the yuan within spitting distance of the 7 level against the dollar, which is psychologically important for Chinese regulators and investors. 

Weakness in the Chinese economy dulled sentiment towards broader Asian markets. The fell 0.2%, while the shed 0.3%, even as data showed that grew more than expected in the first quarter.

The shed 0.1%, but remained relatively underpinned on expectations of more interest rate hikes by the .

The fell 0.1%, and was set for mild weekly gains as fears of a U.S. banking crisis and uncertainty over the debt ceiling made for some safe haven demand. 

On the other hand, the dollar steadied on Friday after strong gains this week. The and were set to add about 0.8% each this week.

While a surprise jump in U.S. pointed to some cooling in the labor market, sticky inflation readings for April pushed up expectations that the will keep interest rates higher for longer this year.

Both U.S. and price inflation eased slightly in April, but remained well above the Fed’s target range.

also showed that markets were dialing down expectations for any interest rate cuts by the central bank this year.

Such a trend heralds more support for the dollar, and is likely to pressure Asian currencies as the gap between risky and low-risk debt remains narrow. Most Asian central banks have wound down their rate hike cycles this year, providing little support to regional currencies.

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