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Asia FX creeps higher, dollar dips ahead of Fed rate hike

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Most Asian currencies crept higher from recent losses on Wednesday, while the dollar relinquished some gains as markets hunkered down before a widely expected interest rate hike by the Federal Reserve later in the day.

Market holidays in China and Japan kept regional trading volumes slim.

Still, the Japanese yen rose 0.4%, recovering from a near two-month low as fears of a U.S. banking crisis drove up safe haven demand. But the outlook for the yen remained muted, following dovish signals from the Bank of Japan on tightening monetary policy.

The South Korean won added 0.3%, recovering slightly after tumbling to a five-month low in April, while the Singapore dollar added 0.1%.

The Australian dollar rose 0.1%, extending gains after the Reserve Bank unexpectedly hiked interest rates on Tuesday and signaled more tightening to curb high inflation. Slightly stronger-than-expected retail sales data on Wednesday also showed some resilience in the Australian economy, which gives the RBA more headroom to hike rates.

The Thai baht rose 0.1% even as data showed consumer inflation eased more than expected in April, which likely necessitates a less hawkish stance from the country’s central bank.

The offshore yuan moved little after logging wild swings this week, but was still trading near a two-month low after data showed that a post-COVID economic rebound in China was running out of steam.

Broader Asian currencies edged higher, while the dollar fell slightly against a basket of currencies, as markets awaited the conclusion of a two-day Fed meeting later in the day.

The dollar index and dollar index futures fell about 0.2% each.

While the Fed is widely expected to hike interest rates by 25 basis points, markets are split over whether the central bank will announce a pause in its rate hike cycle.

While a brewing banking crisis and worsening economic conditions could push the Fed into announcing a pause, inflation still remains well above the central bank’s target range, which could attract more monetary tightening measures.

Comments from Fed Chair Jerome Powell will be closely watched for more cues on monetary policy.

A hawkish outlook from the Fed could potentially spur more weakness in Asian currencies, which were battered by rising interest rates through 2022. While most Asian central banks have paused their rate hike cycles, more hikes by the Fed could further narrow the gap between risky and low-risk yields.

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