Asia FX weak ahead of US inflation; yen dips as BOJ gives little support

Most Asian currencies weakened on Friday, while the dollar steadied in anticipation of key inflation data that is expected to factor into the Federal Reserve’s stance on interest rate cuts. 

While an overnight drop in the dollar- following weaker-than-expected U.S. gross domestic product data- offered some relief to Asian units, this was largely offset by persistent bets on higher-for-longer U.S. interest rates. The dollar also trimmed some of its losses in Asian trade. 

The Japanese yen was an underperformer, with the USDJPY pair rising past 156 to new 34-year highs after comments from the Bank of Japan sparked doubts over just how much capacity the central bank had to raise interest rates further. 

The BOJ left interest rates unchanged after a historic hike in March. The central bank also forecast higher inflation in the coming years.

But the BOJ also forecast weaker growth in the Japanese economy, raising doubts over just how much capacity it would have to keep raising interest rates. This presented a largely dovish outlook for the yen.

Softer-than-expected consumer price index inflation data from Tokyo– released earlier on Friday- further sparked doubts over a hawkish BOJ.

Still, losses in the yen were limited by continued fears of government intervention in currency markets. An upcoming press conference with BOJ Governor Kazuo Ueda, also presented the possibility of more hawkish signals. 

Broader Asian currencies also weakened on Friday, amid persistent fears of higher-for-longer U.S. interest rates. The Chinese yuan’s USDCNY pair rose slightly and remained close to recent five-month highs.