Investing.com– Most Asian currencies gained on Thursday as the dollar weakened after the Federal Reserve signaled an interest rate cut was imminent and the Japanese yen hit a five-month high on hawkish signals from the Bank of Japan.
However, the Chinese yuan lagged behind its peers, as did the Australian dollar after another string of faint economic signals from Asia’s largest economy.
And they posted massive losses after Federal Reserve Chairman Jerome Powell said on Wednesday that an interest rate cut in September was possible due to more encouraging inflation and labor market data.
As his comments suggest, markets were almost entirely pricing in a 25 basis point cut in September, with a 50 basis point cut unlikely.
The prospect of lower interest rates has boosted the value of most Asian currencies.
Japanese Yen Strengthens Further, USDJPY Below 150 on Hawkish BOJ
The yen was the best performer in Asia on Thursday, extending forceful gains from the previous session following the Bank of Japan meeting and signaling the possibility of further gains this year.
The yen fell above 150 yen for the first time since March, continuing a pointed decline seen throughout most of July.
The Bank of Japan raised its short-term interest rate by 15 basis points and signaled plans to halve the pace of quantitative easing only in early 2026. The yen initially saw a volatile reaction to the move, given that an extended timeline for tapering QE was seen as dovish.
But comments from Governor Kazuo Ueda have tipped perceptions of the BOJ back into hawkish territory. Ueda said the BOJ is prepared to raise interest rates even higher this year on an expected rise in inflation and improving economic conditions.
Ueda said higher wages are expected to boost consumption and inflation, which is in line with the central bank’s expectations.
He also added that 0.5% is not the upper limit at which the BoJ can raise interest rates.
The prospect of higher domestic interest rates and lower U.S. rates bodes well for the yen, which has been underperforming for the past two years. But the yen’s strength has also unraveled a broader carry trade.
China’s yuan lags on broader economic woes
The Chinese yuan lagged most Asian currencies on Thursday after the country released another faint purchasing managers’ index.
The pair was up 0.2%, having fluctuated wildly in recent sessions as investors grappled with faint data from the country.
The data showed an unexpected contraction in China’s manufacturing sector, matching PMI data released by the government on Wednesday.
The readings raised concerns about a broader slowdown in China’s biggest economic engines and further soured sentiment toward the country. They also prompted more calls for stimulus measures from Beijing.
Concerns about China weighed on the Australian dollar, which fell 0.2% due to the currency’s hefty exposure to trade with China. Stronger-than-expected data did little to boost the Australian dollar, with the trade surplus remaining near four-year lows.
Other Asian currencies rose on the prospect of lower U.S. interest rates. The South Korean won fell 0.4%, while the Indian rupee steadied after falling sharply from record highs on Wednesday.
