Asian currencies generally weakened on Wednesday as traders favored the dollar ahead of crucial U.S. inflation data. This shift pushed the Japanese yen close to intervention levels previously seen in May.

The Australian dollar, however, bucked the trend, appreciating sharply following an unexpected inflation spike that raised fears of an interest rate hike by the Reserve Bank of Australia (RBA).

Souring sentiment towards China, exacerbated by trade war fears, added pressure on the yuan and dragged most other Asian currencies lower.

The dollar index and dollar index futures firmed slightly in Asian trading, hovering near two-month highs. The market’s focus this week is primarily on the PCE price index data, the Federal Reserve’s preferred inflation gauge.

Japanese Yen Nears Intervention Threshold

The Japanese yen’s USD/JPY pair edged up 0.1% to 159.80 yen, nearing the critical 160 yen level that had previously triggered government intervention. Officials reiterated warnings that they would intervene in the event of excessive volatility, preventing the USD/JPY from breaching 160, at least for now.

The yen’s recent weakness follows dovish signals from the Bank of Japan during its June meeting, coupled with fears of sustained high U.S. interest rates, which kept traders short on yen and long on the dollar.

Australian Dollar Strengthens on Inflation Data

The Australian dollar’s AUD/USD pair surged 0.5% after consumer price index (CPI) data for May came in hotter than expected. This pushed inflation further away from the RBA’s 2% target range, leading to speculation that the central bank might hike interest rates further in 2024.

This inflation reading came just a week after the RBA held rates steady but adopted a more hawkish tone than anticipated. Australian bond yields spiked following the CPI data, with market participants speculating that the RBA could raise rates as early as August.

Broader Asian Currency Weakness

Elsewhere in Asia, currencies weakened as anticipation of key U.S. inflation data drove traders towards the dollar. Concerns about China also made traders wary of regional markets.

The Chinese yuan’s USD/CNY pair remained at a seven-month high after another weak midpoint fix by the People’s Bank of China (PBOC). Ongoing pressure on the yuan, amid fears of a trade war with the West, led the PBOC to issue weak midpoint fixes for two consecutive days.

The South Korean won’s USD/KRW pair rose 0.1%, while the Singapore dollar’s USD/SGD pair also edged higher. Meanwhile, the Indian rupee’s USD/INR pair rose marginally but stayed below record highs reached earlier in June.

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