Asian Currencies Slightly Fall as Dollar Retreats Amid Israel-Hamas Conflict
Asian Currencies and the Dollar
Most Asian currencies experienced a slight decline on Monday, while the dollar retreated from recent highs as investors remained concerned about the potential impact of the Israel-Hamas conflict. Risk appetite for Asian currencies remained fragile, and the dollar saw some profit-taking after reaching 10-month highs last week. The negative sentiment towards Asian markets was largely driven by fears of higher U.S. interest rates following a strong inflation reading in September.
Economic Indicators from China and Japan
This week, the focus is on key economic indicators from China and Japan. The Chinese yuan fell 0.1%, with third-quarter data expected later in the week. The reading is anticipated to show continued weakness in Chinese economic growth, despite the lifting of anti-COVID measures earlier this year. The People’s Bank of China will also decide on its key interest rates this week, although it is unlikely to make any changes after keeping medium-term lending rates unchanged. The Japanese yen firmed slightly and remained close to the 150 level, which could trigger intervention by the Japanese government in currency markets. Japanese employment data for September is also awaited, and any signs of stickiness in inflation could give the Bank of Japan more reason to tighten monetary policy.
Oil Prices and Commodity Weakness
The Indonesian rupiah strengthened slightly, supported by recent weakness in oil prices, while market participants awaited economic data later in the day. The Indian rupee rose 0.4%, recovering from a 10-month low, although its sentiment remained dampened by weakness in commodity prices.
Dollar Remains Strong Amid Middle East Tensions
Safe Haven Demand and Middle East Conflict
The euro and pound both fell about 0.1% in Asian trade on Monday, primarily due to profit-taking. However, the ongoing Israel-Hamas conflict increased demand for safe-haven assets, keeping the dollar close to a 10-month peak. While Israel’s planned ground assault on the Gaza strip could escalate the conflict and potentially involve more Middle Eastern countries, U.S. officials believe such a scenario is unlikely.
U.S. Interest Rates and Economic Readings
The Australian dollar stabilized on Monday after experiencing a nearly 4% slump against the dollar in the past two weeks. The dollar was also boosted by expectations of higher U.S. interest rates, driven by robust consumer inflation and sentiment. This week, the focus is on a string of Federal Reserve speakers and additional U.S. economic readings. The narrowing gap between risky and low-risk yields is likely to put pressure on Asian markets, as U.S. rates are expected to remain higher for longer.
