Asian FX muted, dollar hits three-year low ahead of PCE inflation data
Asian currencies traded in a narrow range on Friday morning, as risk sentiment eased after a strong rally earlier in the week on the back of easing Middle East tensions. Meanwhile, the US dollar continued to hover near its lowest level in more than three years, as investors awaited data on PCE inflation, the Federal Reserve's preferred inflation gauge.
Taiwan leads region, markets react cautiously to macro factors
The Taiwanese dollar was the bright spot in the region, posting its biggest gain in more than three years. The greenback's marked weakness was a key driver of the gains.
The gains in Asian currencies this week were largely supported by sentiment following the news of a ceasefire between Iran and Israel, brokered by the US. However, the euphoria began to cool by the end of the week as markets focused on longer-term macroeconomic risks.
Sentiment restrained ahead of tariff deadline and Fed cues
Currencies such as JPY, CNY, SGD, INR, AUD were all flat, while KRW edged down 0.2%. Markets are awaiting developments on US President Donald Trump's trade policy, as a three-month deadline to reach a trade deal with major economies expires in early July.
“Uncertainty over whether tariffs will be imposed or extended has kept investors on the sidelines for now,” said a Singapore-based FX expert.
In addition, while US Commerce Secretary Howard Lutnick has hinted at a deal with China, the lack of specifics has kept markets from reacting positively.
Dollar struggles as investors await PCE data
The Dollar Index rebounded slightly after a sharp decline this week, but is still hovering around its lowest level since early 2021, due to concerns about the Fed's independence.
President Trump continued to criticize Fed Chairman Jerome Powell, calling for the Fed to cut interest rates immediately. However, Powell and other Fed officials such as Neel Kashkari have signaled caution, citing inflation risks from tariff policies.
The focus now is on the personal consumption expenditure (PCE) price index report due later in the day. This is the Fed's preferred inflation measure and is expected to increase slightly in May.
"If the PCE data beats expectations, rate cut expectations will recede and the dollar could recover," said a currency analyst in Tokyo.
Conclusion: Wait for the next move
Asian FX markets may continue to be choppy until there is a clearer signal from the Fed and US inflation data. Any surprise from PCE data could trigger a sharp correction.
Meanwhile, uncertainties surrounding trade policy and geopolitical risks continue to be key variables affecting capital flows in global currency markets.