Asia FX weakens amid debt ceiling woes, dollar at two-month high

Investing.com — Most Asian currencies slid on Thursday, while the dollar hit a two-month high as uncertainty over raising the U.S. debt limit and averting a default saw investors avoid risk-driven assets.

Worsening sentiment towards China also weighed on regional currencies, amid reports that the country faces a resurgence in COVID-19 cases, which could peak by late-June. 

The fell 0.2% to a near six-month low, pushing further below the 7 level after a breach last week. Fears of a renewed COVID outbreak added to concerns over slowing economic growth in the country, after a string of weak readings for April.

Potentially worsening ties between Beijing and Washington also pressured the yuan.

Concerns over China spilled over into broader Asian markets, with the down 0.2% as data confirmed that the island state’s in the first quarter, largely in part due to slowing Chinese demand.

The shed 0.2%, also coming under pressure from its high trade exposure to China, while the dropped 0.5%. The won was also pressured by the holding interest rates steady for a third straight month, with some traders positioning for a possible rate cut later this year. 

Broader Asian currencies retreated as fears of a U.S. debt default persisted, with Democrat and Republican lawmakers flagging little progress toward raising the debt limit.

The latest blow to sentiment came from ratings agency in the event of a default. 

The sank 0.2% to a six-month low against the dollar, while the fell 0.1% and traded close to a two-month low.

The dollar benefited from increased safe haven demand, while traders also dumped treasuries in favor of the greenback. The and rose 0.2% each in Asian trade, and were hovering at two-month highs.

Mixed signals on monetary policy also supported the greenback, as the of the Federal Reserve’s May meeting showed that interest rates were likely to remain higher for longer.

show markets were pricing in an over 60% chance the Fed will hold rates in June. But a growing number of participants are also pricing in the possibility of another rate hike.

Weak risk appetite and high U.S. interest rates pointed to more pressure on Asian currencies in the coming months, continuing a trend seen through 2022.

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