Asian currencies were mostly under pressure on Friday, while the Japanese yen weakened for a second consecutive session.
The move came as the U.S. dollar remained close to a one-week high, with traders waiting for fresh U.S. inflation data and several major central-bank decisions scheduled for next week.
The U.S. Dollar Index traded near 99.10, after gaining around 0.3% on Thursday and reaching its highest level since September 7.
Yen Weakens Against the U.S. Dollar
The USD/JPY pair traded near 154.34, leaving the dollar around 1.2% higher against the yen over the week.
However, the pair remains more than 3% lower over the past month after the Japanese currency staged a strong rally earlier in September.
The yen continues to react to changing expectations surrounding both the Federal Reserve and the Bank of Japan.
Oil Prices Add Pressure to Asian Markets
Oil prices also remained an important factor for Asian currencies.
Brent crude climbed around 1.2% to $108.96 per barrel during early Asian trading, extending its advance for a sixth consecutive session.
Renewed tensions in the Middle East have increased concerns about potential disruptions to global energy supplies.
Higher oil prices can place additional pressure on countries that depend heavily on energy imports. They can also contribute to stronger inflation, which may influence central-bank policy.
Dollar Supported by Rising Fed Rate-Hike Expectations
The U.S. dollar received additional support from growing expectations that the Federal Reserve could raise interest rates.
U.S. producer prices increased 0.4% in August, matching market expectations.
A rebound in energy prices added to concerns that inflation could remain elevated if crude oil continues to rise.
Markets are now focused on the upcoming U.S. Consumer Price Index report, one of the final major economic releases before the Federal Reserve’s September meeting.
Markets Increase Fed Rate-Hike Bets
Fed funds futures showed a rising probability of another rate increase.
Markets were pricing roughly a 71.3% chance of a 25-basis-point rate hike, compared with around 61.2% during the previous session.
A stronger-than-expected CPI reading could increase expectations for tighter monetary policy and potentially provide further support for the dollar.
DBS expects the Federal Reserve to keep rates at 3.75% at the upcoming meeting, although the bank noted that the decision could be closely contested.
U.S. Treasury Yields Remain Elevated
Higher U.S. bond yields have also weighed on global financial markets.
The 10-year U.S. Treasury yield traded near 4.97%, leaving it close to the psychologically important 5% level.
Higher Treasury yields often support the dollar by making U.S. fixed-income assets more attractive to international investors.
At the same time, elevated yields can place additional pressure on emerging-market and Asian currencies.
Yen in Focus Ahead of Bank of Japan Meeting
The Japanese yen recovered some ground after stronger-than-expected domestic inflation data.
Japan’s wholesale prices rose 7.6% year-on-year in August, exceeding economists’ forecasts.
The data strengthened expectations that the Bank of Japan could raise interest rates next week.
Markets widely expect the BOJ to increase its policy rate by 25 basis points to 1.25% at its September 17-18 meeting.
DBS also expects a 25-basis-point increase, although it believes the central bank may signal a flexible approach to future tightening rather than committing to a rapid series of rate hikes.
Fed and BOJ Decisions Could Drive USD/JPY
The yen is likely to remain highly sensitive to both the Federal Reserve and Bank of Japan decisions.
The direction of USD/JPY could depend heavily on the difference between U.S. and Japanese interest-rate expectations.
Any unexpected shift in guidance from either central bank could create significant volatility in the currency pair.
Asian Currencies Trade Mixed
Other Asian currencies showed mixed performance ahead of a data-heavy week.
The Australian dollar weakened, with the USD/AUD pair gaining roughly 0.6% over the week.
The New Zealand dollar, meanwhile, showed greater strength.
Both the offshore and onshore Chinese yuan remained relatively stable, with USD/CNH and USD/CNY trading broadly flat on the week.
The Singapore dollar also showed limited movement, while the South Korean won remained relatively steady despite strengthening during Friday’s session.
Indian Rupee Pressured by Higher Oil Prices
The USD/INR pair traded near 95.67, as the Indian rupee faced pressure from the sharp rise in oil prices.
India is a major importer of crude oil, meaning higher energy costs can worsen inflation and increase demand for foreign currency.
As a result, sustained strength in oil prices could continue to weigh on the rupee.
Major Asian Economic Data Ahead
Investors are also preparing for several important economic releases across Asia next week.
India is scheduled to release August CPI inflation, exports and imports on Monday.
China will publish retail sales, industrial production and fixed-asset investment data for August on Tuesday.
Japan will then release its latest trade figures on Wednesday.
These releases, combined with major central-bank decisions, could create a volatile week for Asian foreign-exchange markets.
Asian Currencies Remain Sensitive to Dollar Strength
For now, the outlook for Asian currencies remains closely tied to the direction of the U.S. dollar.
Stronger U.S. inflation data could reinforce expectations for higher Federal Reserve rates and push the dollar higher.
At the same time, upcoming Bank of Japan policy decisions could determine whether the yen is able to regain momentum.
With oil prices, bond yields and central-bank policy all in focus, currency markets could remain volatile in the days ahead.
