GLOBAL MARKETS | Most Asian currencies strengthened on Thursday, led by a significant rally in the Japanese yen, as the U.S. dollar came under pressure from growing market certainty of an interest rate cut by the Federal Reserve in September.
Improving risk appetite and a softer dollar provided a tailwind for broader Asian markets, with traders now pricing in a near-100% probability that the Fed will lower rates next month. However, the positive sentiment was tempered by caution surrounding potential U.S. trade tariffs, particularly as India works to avoid steep duties on its exports.
Japanese Yen Surges on Rate Hike Speculation
The Japanese yen was the day’s top performer in Asia, with the USD/JPY pair sliding 0.5% to 146.72. The yen’s strength was fueled by heightened speculation that the Bank of Japan (BOJ) is moving closer to an interest rate hike.
This speculation was amplified by comments from U.S. Treasury Secretary Scott Bessent, who told Bloomberg that the BOJ was “behind the curve” in its efforts to manage inflation and would need to raise rates. His remarks stand in contrast to the more cautious tone from BOJ Governor Kazuo Ueda, who has consistently signaled that rate hikes will be tied to sustained inflation.
While recent inflation readings in Japan have softened, core prices have remained above the BOJ’s 2% annual target, keeping the possibility of a rate hike on the table. Investors are now looking ahead to Japan’s second-quarter GDP data, due Friday, for further clues on the health of the economy.
Dollar Drifts Lower as September Cut Becomes Consensus
The U.S. dollar index and dollar index futures continued their decline on Thursday, extending overnight losses. The weakness stems from mounting evidence of a cooling U.S. economy.
According to the CME FedWatch Tool, investors are now pricing in a 97% chance of a 25-basis-point rate cut by the Federal Reserve in September. The prospect of lower U.S. interest rates makes other currencies relatively more attractive, boosting demand for assets across Asia.
Elsewhere in the region:
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The Chinese yuan (USD/CNY) saw a slight dip, with investor focus now on key economic data, including industrial production and retail sales, due on Friday.
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The Australian dollar (AUD/USD) rose marginally after labor market data for July came in slightly below expectations, reinforcing the view that the country’s labor sector is cooling and could invite future rate cuts from the Reserve Bank of Australia.
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The South Korean won (USD/KRW) gained 0.4%, while the Singapore dollar (USD/SGD) was flat.
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The Indian rupee (USD/INR) steadied after recent volatility. However, sentiment toward India remains clouded by the looming threat of significant U.S. tariffs over its purchases of Russian oil, creating a key point of uncertainty for the currency.
