Asian Currencies Strengthen on US-China Trade Optimism as Dollar Weakens Before Fed Decision
Most Asian currencies strengthened on Monday, supported by renewed optimism after the United States and China announced a framework trade agreement. The deal lifted risk sentiment across markets, while the U.S. dollar edged lower as investors grew confident that the Federal Reserve will cut interest rates this week.
The Japanese yen underperformed, staying under pressure as traders speculated that the Bank of Japan would delay further rate hikes. Market expectations point to resistance from new Prime Minister Sanae Takaichi, who is likely to introduce more fiscal stimulus. Even strong inflation data failed to boost the yen, with the USD/JPY pair climbing 0.1%, nearing a nine-month high. The Bank of Japan is also scheduled to meet later this week, adding more uncertainty to the yen’s short-term outlook.
Regional Currencies Gain on Softer U.S. Inflation
Asian currencies found support from slightly weaker-than-expected U.S. inflation data released last week. The softer reading fueled expectations for additional Fed rate cuts, sparking a broader risk-on rally across financial markets.
Chinese Yuan Firms on Trade Progress
The Chinese yuan also firmed, with the USD/CNY pair slipping 0.1%. The move was supported by a strong midpoint fix from the People’s Bank of China and renewed optimism over trade progress.
Over the weekend, Washington and Beijing confirmed they had reached a framework trade deal, which will be further developed when President Donald Trump meets Xi Jinping in South Korea later this week.
Talks held on the sidelines of the ASEAN summit in Malaysia focused on avoiding new tariff hikes and easing restrictions on rare earth exports, helping calm investor concerns over renewed trade tensions.
Wider Asian Market Reaction
The Taiwan dollar also strengthened on Monday, with the USD/TWD pair falling 0.3%. The Australian dollar rose 0.3% against the greenback, while the Singapore dollar slipped slightly.
The South Korean won gained 0.5% against the dollar, and the Indian rupee hovered close to the high-87 level against the U.S. currency.
Dollar Retreats as Markets Await Fed Meeting
The U.S. dollar index and futures both slipped in Asian trading, extending losses after the latest inflation report showed softer-than-expected consumer prices. The data strengthened market expectations of another 25-basis-point Fed rate cut this week.
According to CME FedWatch, markets now price in a 99.6% probability of that scenario.
Lower U.S. rates typically weigh on the dollar and drive capital into higher-yielding Asian currencies, supporting regional markets. With a rate cut largely priced in, traders are now focused on Fed Chair Jerome Powell’s comments for clues about the central bank’s future monetary policy path.
