On Wednesday, there was a decline in most Asian currencies, as the short-term Treasury yields rose because of the US consumer price index (CPI) data that turned out to be stronger than expected.
This gave rise to expectations of more interest rate hikes coming from the Federal Reserve in the next few months and this also strengthened the US dollar.
The sharpest declines were recorded by the Malaysian ringgit and the South Korean won, as they both recorded declines of 0.9% each.
There were also a 0.6% decline in the Thai baht and a 0.3% drop in the Chinese yuan. There was a rise in the US dollar against a basket of its peers after it had had a muted reaction to the inflation data on Tuesday.
There was a 0.2% rise recorded in both the dollar index and the dollar index futures in Asian trading. However, the highest pressure on Asian markets came from the overnight rise in the short-term Treasury yields.
There was a surge between 1.4% and 2.5% in 1-year, 2-year and 5-year Treasury yields after the inflation data in the US showed that consumer prices had remained stubbornly high in the previous month.
This trend is expected to give more strength to the hawkish stance of the US Federal Reserve and would drive the central bank to hike interest rates later in the year.
It also means that Asian currencies will be under more pressure after they already had a rather gloomy 2022, as increasing yields on debt that is relatively lower risk drives capital flows out of the region.
On Tuesday, John Williams, the President of the New York Fed, said that interest rates in the US could reach a peak of more than 5.1%.
He also highlighted that the coming months would see the Fed’s battle against inflation continues.
One currency that seemed to buck the trend was the Japanese yen, as it recorded slight gains against the US dollar on Wednesday, after recording steep losses overnight.
However, there were some fluctuations in the currency after the nomination of economist Kazuo Ueda by the government as the next governor of the Bank of Japan (BOJ).
Considered a wild card pick, Ueda is expected to make adjustments to the BOJ’s monetary policy based on the economic data.
But, since inflation in the country has already reached a high of 40 years, markets believe that there would be a monetary policy tightening seen soon.
Earlier this week, data had also shown that the country’s economy had come very close to declining in the fourth quarter of 2022 and was quickly running out of steam.
There was also a 0.1% rise in the Indian rupee, as inflation readings turned out to be stronger than expected, thereby cementing the hawkish outlook of the Indian central bank.
The currency dropped to record lows for the day, as the corporate demand for the Indian rupee also recorded a decline.