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Asia FX surges, dollar hits one-year low on bets of rate pauses

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Most Asian currencies rose sharply on Friday, while the dollar sank to near one-year lows as soft inflation data spurred increased bets that a pause in the Federal Reserve’s rate hike cycle was imminent.

The Chinese yuan was among the best performers for the day, up 0.5% as a surprise rebound in exports spurred a stronger daily midpoint fix by the People’s Bank. PBOC Governor Yi Gang also reiterated the government’s 5% GDP target for 2023.

While Chinese economic data has painted a somewhat middling picture of an economic recovery, a sustained improvement in exports could feed a bigger rebound this year.

The Taiwan dollar added 0.2%, while the Indonesian rupiah led gains across Southeast Asia with a 0.6% jump. 

The Japanese yen also firmed 0.1%, and was sitting on strong overnight gains as the dollar retreated.

The dollar index and dollar index futures fell 0.2% on Friday to their lowest levels in nearly a year, after data showed that U.S. producer price index inflation grew at a slower-than-expected rate in March.

The data was preceded by a smaller than expected rise in consumer price index inflation, and helped further the notion that price pressures were easing amid high interest rates.

This also spurred bets that the Fed has limited headroom to keep hiking rates, with Fed Fund futures prices showing that markets are positioning for one more hike in May, followed by a pause a June.

A slew of global central banks have paused their rate hike cycles amid easing inflation and slowing growth, with the Monetary Authority of Singapore being the latest to do so on Friday.

Data also showed that the Singapore economy slowed more than expected in the first quarter of 2023, amid a sustained decline in manufacturing activity.

This saw the Singapore dollar lag its peers for the day with a 0.2% dip. 

On the other hand, the Australian dollar was set for a 1.7% jump this week as a substantially stronger-than-expected employment report spurred increased bets that the Reserve Bank may yet raise rates higher.

While most Asian currencies advanced on Friday, sentiment towards risk-driven assets still remained frayed amid fears of a 2023 recession.

Risk appetite remained weak as the Fed sounded concerns over a “mild” recession later this year. Safe havens such as gold were among the best performing assets this week. 

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