Asia FX dips as Chinese inflation disappoints, dollar steadies

Investing.com– Most Asian currencies retreated on Friday as weak Chinese inflation data pushed up concerns over slowing growth in Asia’s largest economy, while the dollar steadied after steep overnight losses as a Federal Reserve meeting loomed.

The fell 0.1% and hovered around six-month lows after data showed that Chinese shrank in May from the prior month, while fell at its sharpest pace in seven years- the tail end of the yuan devaluation shock.

The data followed a string of weak economic readings from China in the past two weeks, which indicated that a post-COVID economic rebound in the country was largely running out of steam. 

More Chinese stimulus on tap, but yuan to suffer

Weak economic trends from China pushed up expectations that Beijing will roll out more supportive measures in the coming months. China’s biggest state-owned banks cut their interest rates on yuan deposits this week, potentially heralding a broader rate cut by the People’s Bank.

But this trend indicates more headwinds for the yuan, especially if the gap between local and overseas interest rates widens. 

The Chinese government may also be intentionally keeping the yuan depressed in order to shore up export revenues and local spending. But the weak inflation data shows that Chinese consumers have so far kept their purse strings tight.

Weakness in China spilled over into other Asian markets, although broader losses were somewhat muted as as unexpected surge in weekly pushed up expectations for a pause in the Federal Reserve’s rate hike cycle.

The fell 0.2%, while the was flat. The sank 0.2% as markets weighed worsening economic trends in the country against the prospect of more rate hikes by the Reserve Bank of Australia. 

The steadied after the as expected on Thursday. 

Dollar steadies from overnight tumble, Fed pause in focus

The dollar steadied on Friday after steep overnight losses, as data showed U.S. jobless claims surged through the past week. The and both rose about 0.1% in Asian trade.

The weak labor data pushed up hopes that the Fed will pause its rate hike cycle when it , given that other economic indicators also pointed to a cooling U.S. economy. While such a move could bring some near-term relief to Asian currencies, gains are expected to be limited as U.S. rates stay higher for longer.

Worsening economic trends in China are also expected to limit the appeal of most Asian units, given their heavy trade exposure to the country.

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