Asia FX under pressure as weak Chinese data, hawkish Fed weigh

© Reuters.

By Ambar Warrick

Investing.com -- Most Asian currencies moved in a flat-to-low range on Thursday, coming under pressure from softer-than-expected Chinese inflation data, while persistent concerns over rising U.S. interest rates and a hawkish Federal Reserve also weighed.

The Chinese yuan fell 0.2% and was among the worst performers for the day after consumer and producer inflation read weaker than expected for February. The reading, coupled with weak trade data earlier this week and a soft GDP forecast for the year, ramped up concerns that a Chinese economic rebound may not be as pronounced as initially expected.

Soft inflation gives the People's Bank less headroom to eventually tighten policy - which, coupled with rising U.S. interest rates, is likely to batter the yuan in the near-term. The currency was close to breaking below the key 7 level against the dollar, which could herald more losses.

Weakness in China bodes poorly for broader Asian markets, given their reliance on the country as a major trading hub. Other China-exposed currencies were also under pressure, with the Taiwan dollar and the South Korean won losing 0.2% each.

Broader Asian currencies were nursing steep losses for the week after Federal Reserve Chair Jerome Powell warned that U.S. interest rates will likely rise more than market expectations, due to strength in the jobs market and stubborn inflation.

His comments sparked a rally in the dollar and U.S. Treasury yields, drawing capital away from most Asian markets. The dollar hovered just below a three-month high against a basket of currencies on Thursday, with the dollar index and dollar index futures losing 0.1% each.

Overnight data indicated continued strength in the labor market, with a gauge of private payrolls rising more than expected in the month through mid-February.

Focus is now squarely on nonfarm payrolls data from the labor department, due on Friday. Any signs of strength in the U.S. economy give the Fed more space to keep raising rates.

Still, some Asian currencies attempted a recovery from sharp losses earlier this week. The Australian dollar rose 0.4% after sinking to an over three-month low this week, while the Japanese yen jumped 0.4% after hitting an over two-month low.

But the upside for the yen remained limited, with the Bank of Japan widely expected to hold interest rates at record-low levels on Friday. The bank is also expected to maintain its yield curve control measures, keeping local liquidity high and the yen subdued.

Data on Thursday showed Japan's economy stagnated in the fourth quarter, amid pressure from high inflation and weak manufacturing.