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On Wednesday, Asian currencies fell on fears of a banking crisis that triggered a sharp rise in Treasury yields. This makes some people think that the Federal Reserve still has room to continue raising interest rates.
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Along with that, the dollar also strengthened again against a number of currencies in Asian trade, but still tends to be close to its lowest level in 2023. The dollar index and dollar index futures rose by about 0.2%. The Japanese yen fell the sharpest among other Asian currencies, falling about 0.6% as reduced safe-haven demand also supported the yen's downward appeal. The CPI of the Bank of Japan, which is the central bank's inflation gauge, also fell far from expectations during March. This is related to the signal that inflation is likely to reach its peak in the country of the rising eye. This leaves room for the BoJ to maintain its ultra-loose policy which is expected to weigh on the yen even more in the near term.
The Chinese yuan fell about 0.2%, shifted slightly and returned to 7 against the USD amid high anxiety over the scale of the economic rebound in China this year. Meanwhile, Friday's reading is expected to show a decline in March as it recovers after Covid-19 subsides. China's massive export sector also faces high headwinds from reduced global demand. Asian currencies as a whole weakened after Michael Barr, the Fed's chief banking watchdog, told Congress that the U.S. banking system is still strong, and that the recent collapse of several major banks was caused by poor risk management. The Thai baht and the second Taiwan dollar fell 0.3% each, while the South Korean won also fell about 0.2%.
The Aussie dollar also fell by about 0.2% after weaker-than-expected February inflation data gave more confidence to the Reserve Bank's consideration of a pause in interest rate hikes. Barr's comments have sparked some bets that the Fed still has enough room to raise interest rates and fight inflation. US Treasury yields rose overnight due to the influence of the idea. But yields are still well below the highs reached earlier this year, given that the Fed signaled it was close to reaching the terminal rate, which ultimately stopped rates from rising. The unrest of the U.S. banking crisis has devastated the dollar in March amid rising bets that the Fed has little room to tighten their policy further.
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