Most Asian currencies experienced slight declines on Monday, with the dollar retreating from recent highs, as market participants closely monitored the developments of the Israel-Hamas conflict for potential spillover effects.
Investors exhibited cautiousness towards risk-driven Asian currencies, while the dollar observed modest profit-taking after nearing its ten-month peak the previous week. Lingering concerns regarding elevated U.S. interest rates, following a robust September inflation reading, continued to weigh on sentiment across Asian markets.
This week, attention also gravitated towards a series of vital economic indicators emanating from China and Japan. The Chinese yuan witnessed a 0.1% decrease, with third-quarter gross domestic product data scheduled for release later in the week. This data is anticipated to reveal persistent fragility in Chinese economic growth, reflecting subdued business activity despite the earlier removal of anti-COVID measures.
The People’s Bank of China will decide on its key loan prime rates this week, although the prevailing consensus suggests that a change is unlikely, given the PBOC’s recent decision to keep medium-term lending rates unchanged.
Meanwhile, the Japanese yen displayed minor strength and remained in proximity to the 150 level, a threshold at which investors believe the Japanese government may intervene in currency markets. This week’s focus remains on Japanese industrial production, and notably, consumer inflation data for September. Any evidence of lingering inflationary pressures provides the Bank of Japan with additional impetus to tighten its monetary policy, a development that could lend support to the yen.
Recent declines in oil prices contributed to a 0.1% rise in the Indian rupee, with markets eagerly awaiting wholesale inflation data later in the day.
The Australian dollar witnessed a 0.4% uptick, recuperating from a ten-month low. Nevertheless, sentiment surrounding the currency remained dampened due to prevailing weaknesses in commodity prices.
Dollar Attracts Safe-Haven Demand Amid Ongoing Middle East Tensions
Both the dollar index and dollar index futures posted marginal 0.1% declines during Asian trade on Monday, driven by profit-taking activities. However, the greenback remained close to its ten-month peak, as safe-haven assets experienced heightened demand due to the ongoing Israel-Hamas conflict.
Israel’s plans to initiate a ground assault on the Gaza Strip raised concerns of an escalation in the conflict, which could potentially draw in more Middle Eastern countries. Nevertheless, U.S. officials indicated that such a scenario appeared unlikely.
The Israeli shekel exhibited stability on Monday, having previously registered a nearly 4% depreciation against the dollar over the past two weeks.
Expectations of rising U.S. interest rates further bolstered the dollar’s standing, supported by recent data demonstrating robust consumer inflation and sentiment. This week, market participants will closely monitor a series of Federal Reserve speakers, alongside additional U.S. economic readings.
U.S. interest rates are projected to remain elevated for an extended period, exerting pressure on Asian markets as the divide between high-risk and low-risk yields continues to narrow.
