Most Asian currencies traded in narrow ranges on Thursday, as the dollar's weakness was offset by continued caution amid the escalating conflict in the Middle East.
Investors were hesitant to open new positions in riskier regional assets.
The Middle East conflict escalated after the US launched strikes on Iranian military installations for the fifth consecutive day, and Tehran reiterated that control of the Strait of Hormuz is key to its security. This raises the possibility of further disruptions to global energy supplies.
Nevertheless, the dollar remained under pressure, as weaker-than-expected US consumer and factory inflation data reinforced expectations that the Federal Reserve will likely leave interest rates unchanged this month. The USD index was little changed near 100.5, holding near its lowest level in nearly a month after sharp declines in the previous two sessions.
Won under pressure after Bank of Korea rate hike; yen remains at risk of intervention
The USD/KRW pair was little changed, trading around 1,485 won, after the Bank of Korea raised its interest rate for the first time in three and a half years – by 25 basis points to 2.75% – signaling the possibility of further monetary tightening amid persistently high inflation.
The widely anticipated decision provided only limited support for the won, as investors continue to weigh persistent foreign selling of South Korean tech stocks and overall geopolitical uncertainty. While the country's semiconductor-focused economy continues to outperform, capital outflows from equities have weighed on the currency in recent weeks.
The Japanese yen also remained in focus. The USD/JPY pair edged lower to around 162.1 yen, with traders remaining wary of potential intervention following Finance Minister Satsuki Katayama's recent comments about a possible review of the Government Pension Investment Fund's asset structure. These comments fueled speculation that policymakers are increasingly concerned about the yen trading near multi-decade lows.
The USD/AUD pair edged higher amid a weaker Australian dollar, while the USD/NZD pair also edged higher, with the New Zealand dollar giving back some of its recent gains after outperforming earlier this week on the back of a 25 basis point interest rate hike.
Yuan Stable Despite Weak Dollar: PBOC Signals Exchange Rate Flexibility
The Chinese yuan showed little reaction to the weakening dollar, as mixed economic data and fresh comments from the People's Bank of China (PBOC) reinforced expectations that the central bank favors a broadly stable exchange rate over a sharp appreciation.
The USD/CNY pair was little changed, trading around 6.77 yuan, while the offshore USD/CNH pair also remained broadly stable, reflecting a muted market reaction even after the PBOC set its daily target at its strongest level since April.
China's economy expanded 4.3% year-on-year in the second quarter, missing expectations and posting its weakest growth rate in more than three years. The disappointing data fueled concerns about a slowdown in Asia's largest economy, which remains the region's top trading partner and a key source of demand for North and Southeast Asian exports. Weaker growth also fueled expectations of additional policy support from Beijing, though this did not immediately support the yuan.
Speaking on Wednesday, PBOC Deputy Governor Zou Lan stated that the central bank favors a more flexible yuan with two-way fluctuations and will allow market forces to play a greater role in determining the exchange rate, while expressing no interest in ensuring sustainable currency appreciation.
Markets will now turn their attention to US retail sales data and weekly jobless claims due later in the day, after weaker consumer and factory inflation data sharply dampened expectations for a Fed rate hike in July. Investors will also closely monitor developments in the Middle East.