Most Asian currencies advanced slightly on Wednesday, while the Chinese yuan reached its weakest level in more than 17 years after U.S. President Donald Trump hiked his tariffs against Beijing.
The dollar weakened further in Asian trade, while the Japanese yen benefited from safe haven demand as markets also began pricing in an increased chance of a U.S. recession, due to increased disruptions from Trump’s tariffs.
The dollar in particular was hurt by bets that the Federal Reserve will cut interest rates sooner and by a bigger margin to offset the impact of Trump’s tariffs. This notion offered some support to Asian currencies, although most units were still nursing steep losses.
Broader Asian markets also tumbled on Wednesday, given that Trump’s tariffs are also aimed at several major economies beyond China. Trump’s reciprocal tariffs will take effect from 00:01 ET (04:01 GMT) on Wednesday.
Chinese yuan at 17-yr low as PBOC weakens grip in face of tariffs
The Chinese yuan’s USD/CNY pair rose 0.2% to 7.3499 yuan- its highest level since November 2007.
Weakness in the yuan came after the People’s Bank of China set a weaker midpoint fix for five consecutive days, as Beijing braces for an escalated trade war with the U.S..
Trump on Tuesday signed an order imposing an additional 50% tariffs on China, bringing cumulative U.S. tariffs against the country to 104%. The figure is well above the 60% threatened by Trump during his campaigning efforts last year.
Trump said the 50% hike was in retaliation for China’s imposition of 34% retaliatory tariffs against the U.S. last week.
The PBOC’s loosening of its yuan controls appeared to be aimed at increasing the value of Chinese exports, which could in turn help the world’s second-largest economy better weather a dire trade war with the U.S.
China has so far shown no intent of backing down, with the Commerce Ministry vowing to “fight to the end” with the U.S. over its increased tariffs.
Markets also speculated that China was dumping its vast holdings of U.S. Treasuries, which was causing a massive spike in yields.
Asia FX drifts higher, yen strong
Barring the yuan, other Asian currencies clocked mild gains on Wednesday, recouping a small measure of recent declines.
The Japanese yen was an outperformer, with the USD/JPY pair dropping 0.4% and remaining in sight of a recent six-month low. The yen was bolstered by safe haven buying, while traders also took some solace from Japan sending delegates for trade talks with the U.S.
The Australian dollar’s AUD/USD pair jumped 0.5% after slumping to a five-year low, while the Singapore dollar’s USD/SGD pair fell 0.2%.
The South Korean won’s USD/KRW pair fell 0.2% after racing to a 16-year high, with the country also facing steep U.S. tariffs. South Korea’s key automobile industry is also subject to Trump’s 25% tariffs on all auto imports.
The Indian rupee’s USD/INR pair rose 0.3% before a Reserve Bank of India (NSE:BOI) rate decision later in the day, where the central bank is widely expected to cut interest rates by 25 basis points.
The New Zealand dollar’s NZD/USD pair was flat even after the Reserve Bank of New Zealand cut interest rates as expected and flagged the potential for more easing, albeit in the face of an uncertain economic outlook.
Dollar weak amid recession fears, rate cut bets
The dollar index and dollar index futures slid about 0.5% each in Asian trade, pressured by growing uncertainty over the impact of Trump’s tariffs.
Markets were seen positioning for a greater chance of a U.S. recession due to disruptions caused by Trump’s policies.
This in turn sparked more bets that the Fed will cut interest rates earlier and by a deeper margin to support the U.S. economy.
While protectionist policies, like Trump’s tariffs, usually tend to support the dollar, the greenback was hit by a wave of extended selling on uncertainty over the U.S. economy.
The minutes of the Fed’s March meeting are due later on Wednesday, and are expected to offer more cues on monetary policy.
Source : Investing