Asian currencies traded unevenly on Monday as the U.S. dollar remained close to a two-week high following hawkish comments from Federal Reserve Chair Kevin Warsh.
Meanwhile, the Japanese yen hovered near the important 160-per-dollar level, while rising oil prices added further pressure across regional markets.
Dollar Holds Near Two-Week High
The dollar strengthened after Warsh warned that the Federal Reserve may still need to act if policymakers are not confident inflation is moving sustainably back toward the central bank’s 2% target.
The U.S. Dollar Index traded around 99.6, remaining broadly steady after gaining about 0.6% on Friday.
Warsh’s remarks reinforced expectations that U.S. monetary policy could remain tight for longer.
Fed Rate Hike Bets Rise After Warsh Comments
Markets increased the probability of a September Federal Reserve rate hike to around 57% following Warsh’s speech.
At the same time, the 2-year U.S. Treasury yield climbed to around 4.33%, its highest level in more than a month.
Higher Treasury yields provided additional support for the dollar after the currency spent much of August under pressure.
U.S. Jobs and Inflation Data Take Center Stage
Investors are now waiting for new U.S. economic data to provide clearer guidance on the Federal Reserve’s next move.
Friday’s nonfarm payrolls report is expected to show an increase of around 58,000 jobs, following July’s unexpected decline of 23,000.
The unemployment rate is forecast to remain at 4.1%.
Markets will also closely watch U.S. consumer inflation data due on September 11, which could significantly influence expectations for interest rates.
Higher Oil Prices Add Support to Dollar
Oil prices also strengthened the dollar’s position.
Brent crude futures climbed roughly 2.7% to $90.51 per barrel after U.S. forces struck Iranian launchers on Larak Island.
Iran later retaliated against U.S. forces in Jordan, increasing geopolitical uncertainty and raising concerns over global energy supplies.
The renewed escalation has also reduced expectations for a quick diplomatic resolution to the conflict.
Japanese Yen Remains Near 160
The Japanese yen remained under pressure even as investors continued to expect that the Bank of Japan could raise interest rates in September.
Japanese 10-year government bond yields again reached their highest level since 1996, reflecting expectations for tighter domestic monetary policy.
Despite those rising yields, USD/JPY remained close to the closely watched 160 level.
Bank of Japan Policy in Focus
U.S. Treasury Secretary Scott Bessent said he expected Bank of Japan Governor Kazuo Ueda to take appropriate action on monetary policy.
Bessent also said he planned to meet Ueda during the G20 gathering in North Carolina.
Investors are paying close attention to the talks following the unusual joint yen-buying intervention by Japan and the United States in July.
Yield Gap Could Drive USD/JPY
Nomura strategist Naka Matsuzawa said one of the most important questions for USD/JPY is when the pair’s main driver shifts from absolute U.S. Treasury yields to the yield difference between the United States and Japan.
A stronger return by Japanese life insurers to domestic government bonds could eventually influence that yield gap and have a meaningful effect on the yen.
Chinese Yuan Steady After PMI Data
The Chinese yuan showed little reaction to the latest economic figures.
The onshore USD/CNY pair declined around 0.09% to 6.7200, while the offshore USD/CNH pair slipped about 0.14% to 6.7209.
China’s official manufacturing Purchasing Managers’ Index rose to 49.8 in August from 49.2 in July.
However, the reading remained below 50, indicating that manufacturing activity was still contracting.
The limited reaction in the yuan suggested that the data provided little new support for the currency.
Other Asian Currencies Trade Mixed
Elsewhere in the region, the USD/INR pair fell 0.14% to 95.232, while USD/THB declined slightly to 33.110.
USD/PHP edged higher to 62.402, while USD/MYR gained around 0.15% to 4.0279.
The South Korean won strengthened, with USD/KRW falling 0.5% to 1,370.02.
USD/SGD remained broadly unchanged, while the Australian dollar weakened slightly against the U.S. currency.
Central Bank Decisions and G20 Meeting in Focus
Currency markets are now turning their attention to several major central bank decisions this week.
New Zealand’s central bank is expected to raise interest rates for a second consecutive meeting, while the Bank of Canada is widely expected to leave rates unchanged.
G20 finance ministers and central bank governors are also meeting in North Carolina.
Inflation, global interest rates, the Iran conflict and pressure across bond markets are expected to remain key topics.
For Asian currencies, the near-term direction will likely depend on incoming U.S. data, Federal Reserve expectations, oil prices and whether the yen can move decisively away from the 160-per-dollar area.
