Asian currencies traded within narrow ranges on Friday as escalating tensions in the Middle East reduced demand for risk-sensitive assets.
A softer US dollar offered some support to regional currencies. However, renewed safe-haven demand limited their gains, while the Japanese yen remained close to its weakest level in four decades.
US Dollar Stabilises After Monthly Low
The US Dollar Index rose approximately 0.1% to 100.79.
The index had fallen to a one-month low earlier in the week after softer-than-expected US inflation data encouraged traders to reduce expectations for another near-term Federal Reserve interest rate increase.
Despite the weaker inflation figures, the dollar regained some support as geopolitical risks increased.
US-Iran Conflict Supports Safe-Haven Demand
The United States and Iran launched fresh military strikes on Thursday, intensifying the conflict in the Middle East.
The escalation kept oil prices close to one-month highs and increased concerns that rising energy costs could push inflation higher again.
These risks supported demand for the dollar as a safe-haven currency and offset some of the pressure created by lower US rate-hike expectations.
Japanese Yen Remains Near 40-Year Low
The USD/JPY currency pair traded near 162.4, leaving the yen close to the four-decade low of 162.84 reached earlier this month.
The Japanese currency remained under pressure because of the wide interest-rate gap between the United States and Japan.
Expectations for higher government spending under Prime Minister Sanae Takaichi also weakened investor sentiment toward the yen.
Tokyo Warns Against Excessive Currency Moves
Markets remained cautious about the possibility of direct intervention by Japanese authorities.
Finance Minister Satsuki Katayama repeated that the government was prepared to respond to excessive movements in the foreign exchange market.
Japan spent a record ¥11.73 trillion supporting the yen between late April and late May.
However, recent comments from senior officials were less forceful than previous warnings that the government could take bold action.
Domestic Investment Push May Offer Limited Support
Katayama has encouraged large institutional investors, including Japan’s Government Pension Investment Fund, to increase their exposure to domestic assets.
Such a shift could provide some support to the yen by keeping more capital inside Japan.
Nevertheless, investors remain doubtful that portfolio changes alone can reverse the currency’s decline while the US-Japan interest-rate gap remains wide.
Chinese Yuan Pulls Back From Monthly High
The onshore and offshore yuan weakened slightly against the dollar after recently reaching a one-month high.
Despite the pullback, the Chinese currency remained on track for its third consecutive weekly gain.
Markets showed little reaction after US President Donald Trump renewed accusations that China had interfered in American elections.
Instead, investors turned their attention to the People’s Bank of China’s upcoming loan prime rate decision.
South Korean Won Trades During Market Holiday
The dollar gained slightly against the South Korean won, even though domestic financial markets were closed for a public holiday.
The won continued trading in offshore markets following the introduction of round-the-clock currency trading in the previous month.
This allowed global investors to continue adjusting positions despite the closure of South Korea’s local markets.
Singapore Dollar Holds Steady
The US dollar traded largely unchanged against the Singapore dollar.
Singapore reported a narrower trade surplus and slower growth in non-oil domestic exports.
The figures indicated weaker external demand, although they did not trigger a major move in the currency market.
Malaysian Ringgit Weakens After Inflation Data
The dollar rose approximately 0.3% against the Malaysian ringgit.
Malaysia’s annual inflation rate slowed to 1.9% in June, coming in below market expectations.
The softer inflation reading strengthened expectations that Bank Negara Malaysia could keep interest rates unchanged.
Dollar Heads for Modest Weekly Loss
The US Dollar Index remained on course for a small weekly decline.
Softer US inflation data reduced expectations that the Federal Reserve would raise rates again immediately.
However, uncertainty surrounding the Middle East conflict and future energy prices prevented a larger decline in the greenback.
Federal Reserve Officials Remain Cautious
Federal Reserve Chair Kevin Warsh has said the central bank remains committed to returning inflation to its 2% target.
Governor Christopher Waller has also warned that further monetary tightening may be necessary if inflation remains persistent.
Meanwhile, New York Fed President John Williams has argued that policymakers need continued evidence of easing price pressures before considering lower interest rates.
Dallas Fed President Lorie Logan said on Thursday that borrowing costs may need to rise modestly to ensure inflation returns to target.
These comments encouraged investors to scale back expectations for near-term monetary easing.
Asian Central Bank Decisions Come Into Focus
Attention is now turning toward several important central bank decisions across Asia.
DBS analysts expect the People’s Bank of China to leave its benchmark lending rates unchanged.
Bank Indonesia is forecast to raise interest rates by 25 basis points to support the rupiah as higher oil prices and geopolitical uncertainty increase pressure on the currency.
The bank also expects Japanese inflation to remain firm, supporting expectations that the Bank of Japan will continue gradually normalising monetary policy.
Asian currencies may remain sensitive to movements in the dollar, oil prices and interest-rate expectations as investors assess the economic impact of the US-Iran conflict.
