Chinese Yuan Hits Near 2-Year Low

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FX Signals – China’s yuan sank to a near two-year low to the dollar on Friday, as concerns over slowing growth in the country and hawkish comments from the Federal Reserve weighed on Asian currencies.

The yuan fell as much as 0.4% to 6.8144 to the dollar, its weakest level since September 2020. The fall comes in the wake of a swathe of weak economic data from the country and a dire warning on its beleaguered real estate market.

Concerns over escalating tensions between the United States and China, as Washington and Taiwan began negotiations over a trade agreement, also weighed on Chinese markets.

The yuan, and most other Asian currencies came under increased pressure on Friday after hawkish comments from several Fed officials boosted the dollar and dented risk appetite.

Most major Asian currencies fell between 0.1% and 0.5%.

Dollar Down Slows Rally Over Treasury

Fed members James Bullard and Mary Daly both said the central bank could raise interest rates by as much as 75 basis points in September, given that inflation has remained near 40-year highs despite easing slightly in July.

Rising interest rates in the U.S. have severely dented Asian currencies this year, given that they narrow the gap between risky and low-risk yields. This drives capital away from riskier markets in Asia and into safer bets such as the U.S. dollar and Treasuries.

The dollar index rose 0.2% on Friday, while dollar index futures also gained a similar amount. Both indicators surged 0.9% on Thursday, and were set to rise about 2% for the week.

The dollar hit a one-month high against a basket of peers, indicating that traders were likely pricing in a hawkish Fed in September.

Dollar Rises as Treasury Yields Hit 2-Year High

The Japanese yen fell 0.4% to the dollar, as data showed inflation rose to an over seven-year high in July. Despite rising price pressures, the Bank of Japan has indicated that it has no plans to roll back ultra-loose monetary policy this year.

This contrasts with a path of tightening adopted by most central banks this year.

The Philippine peso fared better than its Asian peers on Friday, rising slightly after the central bank hiked rates as expected on Thursday.

Chinese Yuan Hits Near 2-Year Low

Forex Signals – Asian currencies on recovery

In a glimpse of the emerging debate at the central bank, “many” participants noted a risk that the Fed “could tighten the stance of policy by more than necessary to restore price stability,” a fact that they said made sensitivity to incoming data all the more important, the minutes showed.

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“Some participants at the Fed were noting that interest rate sensitive sectors had begun to show signs of slowing and that there was in the eyes of some participants a risk of overtightening,” said Brian Daingerfield, head of G10 FX strategy at NatWest Markets in Stamford, Connecticut.

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It comes after Fed Chairman Jerome Powell said at the July meeting that the impact of Fed rate increases to date is still building in the economy, and depending on how inflation responds in coming months that could allow the central bank to begin to slow the pace of rate increases.

“That combination I think is giving the minutes a little bit of a dovish feel relative to what we’ve heard from FOMC officials in the aftermath of the meeting,” said Daingerfield.

The dollar index fell to 106.39 after the meeting minutes were released, before rebounding back to 106.55, up 0.09% on the day.

The size of the Fed’s next expected rate hike is expected to depend on consumer price inflation and jobs data for August, which will be released before its September meeting.

The odds of a 75 basis-point hike in September dropped to 40% after the meeting minutes, from 52% earlier on Wednesday, with a 50 basis-point hike now seen as a 60% probability.

Looser financial conditions as benchmark 10-year Treasury yields hold below 3% and as the credit and stock markets improve has also increased speculation the Fed may need to be more aggressive in hiking rates to make an impact.

Retail sales data on Wednesday were solid, helping to reduce concerns about an economic slowdown.

The euro gained 0.13% on the day against the dollar to $1.0185. The greenback gained 0.55% against the yen to 134.97.

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