Australian Dollar Rises on Strong Inflation Figures, Asian Currencies Edge Lower as U.S. Dollar Rebounds.

On Wednesday, most Asian currencies slipped as the U.S. dollar continued to recover from its recent losses, while the Australian dollar emerged as a notable exception, buoyed by stronger-than-expected inflation data that reinforced the case for a hawkish Reserve Bank of Australia (RBA).

Despite the U.S. dollar’s recovery, the decline in Asian currencies was limited as traders remained optimistic about a potential interest rate cut by the Federal Reserve in the coming month. Key inflation data, expected later this week, is anticipated to provide further insights into the Fed’s monetary policy direction.

China Trade Concerns Weigh on Sentiment

Market sentiment in Asia remained cautious amid concerns over China, particularly after Canada imposed steep trade tariffs on China’s electric vehicle sector. This development added to existing trade tensions, keeping investors on edge.

Australian Dollar Hits Near 8-Month High on Sticky CPI

The Australian dollar stood out as one of the best-performing currencies in Asia, with the AUD/USD pair climbing 0.1% to reach a near eight-month high. The surge was driven by stronger-than-expected Consumer Price Index (CPI) data for July.

Headline CPI rose by 3.5%, slightly surpassing expectations due to high food prices. However, subsidies on electricity costs helped moderate overall inflation. Meanwhile, underlying CPI fell to 3.7% from 4%, but it remained well above the RBA’s target range of 2% to 3%.

Wednesday’s CPI reading fueled speculation that the RBA may maintain higher interest rates for an extended period or even consider further rate hikes. Analysts at ANZ noted that while the inflation data was higher, it is unlikely to alter the RBA’s current policy trajectory significantly.

U.S. Dollar Recovers from 13-Month Low, PCE Data Awaited

The U.S. dollar index and futures both rose 0.2% in Asian trading, recovering further from a 13-month low hit earlier this week. The greenback had been under pressure due to dovish signals from Federal Reserve officials, which heightened expectations of a potential rate cut in September.

Traders are currently divided between a 25 or 50 basis point reduction, according to CME FedWatch. Recent indicators of a cooling U.S. labor market have bolstered the case for a larger cut, with some speculating that the Fed could reduce rates by as much as 100 basis points by the end of the year.

This week’s focus is on the Personal Consumption Expenditures (PCE) price index, the Fed’s preferred inflation gauge, which is expected to provide further clarity on the central bank’s rate-cutting plans.

Mixed Performance Among Broader Asian Currencies

Broadly, Asian currencies moved within a flat-to-low range. The Japanese yen’s USD/JPY pair rose 0.3% to 144.44 yen after touching a low of 143.69 yen, supported by expectations of additional interest rate hikes by the Bank of Japan. Upcoming Tokyo inflation data, due on Friday, is expected to offer further cues.

The Chinese yuan’s USD/CNY pair gained 0.1% amid ongoing concerns over a trade war with the West, following Canada’s decision to impose trade tariffs on the EV sector. Beijing criticized the move and may respond with retaliatory measures.

The South Korean won’s USD/KRW pair increased by 0.8%, while the Singapore dollar’s USD/SGD pair edged up by 0.2%.

The Indian rupee’s USD/INR pair stabilized after briefly approaching the 84 rupee level, just shy of record highs.

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