Asia FX stalls, dollar steadies in anticipation of Powell speech

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By Ambar Warrick 

AiVIF.com-- A rally in Asian currencies stalled on Tuesday as markets awaited more cues on U.S. monetary policy from an address by Federal Reserve Chair Jerome Powell later in the day, while caution over a Chinese reopening grew amid rising COVID-19 cases in the country.

Powell is expected to shed more light on the path of U.S. interest rates and economic growth during an address at a bank symposium in Sweden later in the day. 

Markets will be watching for any changes to the Fed chair’s hawkish rhetoric, especially amid growing signs that U.S. inflation is easing. The prospect of a less hawkish Fed is expected to provide much relief to Asian markets, after a sharp rise in rates battered regional markets in 2022.

China’s yuan rose 0.1%, sticking to a four-month high. The currency rallied sharply in recent sessions after China relaxed most anti-COVID measures and reopened its international borders in a clear pivot away from three years of zero-COVID.

But while the move is expected to eventually spur an economic bounceback, markets are cautious over the country’s near-term outlook, as the relaxing of measures also resulted in China’s worst yet COVID-19 outbreak. 

Other China-exposed currencies also slowed after recent gains. The South Korean won traded flat, while the Australian dollar and Singapore dollar lost 0.1% each.  

The Japanese yen was flat, even as data showed inflation in Tokyo grew more than expected in December, likely heralding a similar trend in countrywide inflation. 

The yen had rallied towards the end of 2022 amid growing bets that overheated inflation will push the Bank of Japan into eventually reversing nearly a decade of ultra-loose monetary policy. 

Broader Asian currencies moved little, while the dollar regained some strength after some Fed officials said overnight that the central bank could hike interest rates beyond the 5% mark in 2023. 

The dollar index and dollar index futures rose about 0.2% each, recovering slightly from a seven-month low. The greenback has tumbled in recent months amid growing bets that the Fed will hike interest rates at a slower pace in the near term.

But the central bank also signaled that it will likely maintain high interest rates for longer, raising uncertainty over where U.S. borrowing costs will peak. With inflation still trending well above the central bank’s target range, the path of interest rates is likely to track that of inflation.

Focus this week is also on consumer inflation data for December, due on Thursday. The reading is expected to show that price pressures eased further from the prior month, as economic activity eased and the labor market also cooled.