Investing.com– Most Asian currencies weakened on Thursday as forecasts of fewer interest rate cuts from the Federal Reserve reduced appetite for regional markets, even as the dollar fell on frail inflation readings.

Uncertainty ahead of the Bank of Japan meeting and concerns about trade restrictions between the US and China also affected sentiment towards Asian currencies.

No changes in the Japanese yen, BOJ waited for further signals

The Japanese yen pair was little changed after seeing some volatility earlier in the week, with investors now awaiting further policy signals on Friday.

The central bank is likely to keep interest rates steady but is expected to reduce some of its bond purchases in an effort to tighten policy.

While tighter monetary conditions are expected to provide some support for the yen, investors were questionable about how much leeway the BOJ has to tighten policy given recent signs of economic weakness in Japan.

Nevertheless, inflation data for May showed some improvement, which may be related to the BOJ’s forecast of a possible augment in inflation this year.

The dollar is stabilizing as the Fed’s outlook offsets frail CPI

Both indexes rose slightly in Asian trade as investors digested the hawkish signals from the Fed.

Chairman Jerome Powell said the central bank now sees the possibility of only one rate cut this year, down from an earlier forecast of three. Some policymakers have even called for not cutting interest rates this year in the face of persistent inflation.

The Fed also raised its inflation forecast for 2024.

However, the Fed’s statements were preceded by inflation, which showed that inflation fell slightly more than expected in May. The reading weakened the dollar and caused Treasury yields to decline as investors believed the disinflation narrative.

However, the dollar strengthened following the Fed’s comments, given that higher interest rates in a longer-term environment are likely to benefit the dollar. This scenario also bodes poorly for risky currencies.

Data released later on Thursday is expected to give more clues about inflation.

Broader Asian currencies have mostly retreated, following this concept. The Chinese yuan pair rose 0.1% as reports of greater US trade controls with China hurt sentiment towards the yuan this week.

The South Korean won pair and the Singapore dollar rose 0.3% and 0.2%, respectively.

The Australian dollar pair fell 0.2% even though May’s reading was stronger than expected, giving the Reserve Bank more room to maneuver to keep rates high for longer.

However, the continued decline in hours worked still indicates some cooling in employment.

The Indian rupee pair remained near record highs as sentiment towards the currency remained volatile following the shock 2024 general election result.