Asia FX falls amid U.S. yields, weak China inflation

Asian currencies experienced a setback as the recent increase in U.S. Treasury yields led to concerns over the possibility of a looming recession. The Chinese yuan was also impacted by the latest inflation data, which showed a modest rise in consumer prices and a decrease in producer prices in January.

The Chinese economy, being the largest in Asia and a dominant trading hub for the region, is closely watched as its economic recovery will have a significant impact on the rest of Asia. The mixed inflation readings suggest that the Chinese government may need to implement further stimulus measures and interest rate cuts, which could put additional downward pressure on the yuan.

As the U.S. yield curve inverted, reaching its lowest level since the 1980s, the sentiment across Asia was negatively impacted, leading to a decline in most Asian currencies. Risk-heavy Southeast Asian currencies, such as the Thai baht and Malaysian ringgit, were the hardest hit, losing 0.4% each. The potential U.S. recession may result in reduced foreign capital inflows to these riskier Asian markets.

On the other hand, the dollar gained strength against other currencies, as demand for safe havens increased and the Federal Reserve signalled its hawkish stance. The dollar index and futures rose 0.1% each, and were set for a strong weekly performance.

However, the future of U.S. monetary policy remains uncertain, as recent data showed a slowdown in the job market, with a rise in weekly jobless claims and increasing layoffs. The upcoming inflation data for the U.S. will provide further insight into the state of the world’s largest economy, which is currently grappling with slowing activity.

In Japan, the yen lost 0.1% as producer price inflation eased more than expected in January, but still remained close to 40-year highs. The market is now closely watching the Japanese government’s announcement of the next governor of the Bank of Japan.