Investing.com — Most Asian currencies held steady Wednesday, with the Japanese yen weakening slightly after a strong rally earlier this week, while continued bets on U.S. interest rate cuts sent the dollar to its lowest level in seven months.
The yen’s strength signaled a continued unwinding of the carry trade – a trend that does not bode well for Asia’s risk-driven markets.
But regional currencies benefited from dollar weakness, with traders largely remaining bearish on the greenback as expectations for a September rate cut rose.
The Japanese yen softens after a strong rally, the carry trade is reversed
The Japanese yen weakened slightly after a strong rally this week, with the pair rising 0.2%.
But the pair fell sharply earlier this week, hovering around the 145 yen level, remaining well below the 160 yen high reached earlier this year.
USDJPY had fallen as low as 141 earlier in August after carry trading in the yen was largely disrupted by aggressive signals from the Bank of Japan. Rising Japanese yields are expected to support the yen and further undermine the yen carry trade in the coming months.
Analysts at Jefferies said the USDJPY was likely to reach around 145 yen, but could fall as low as 120 yen if the carry trade unwinds further.
Data earlier on Wednesday showed Japan’s economy grew less than expected in July but recovered sharply.
Dollar at seven-month low with Powell, interest rate cuts in focus
The and moved little in Asian trading after falling to their lowest level since early January on Tuesday.
The dollar was under pressure due to growing expectations that the Federal Reserve would cut interest rates in September. Markets were divided between a 25 basis point or 50 basis point cut next month, it emerged.
A speech by Fed Chairman Jerome Powell at the Jackson Hole Symposium on Friday is expected to provide more clues about the central bank’s plans to cut rates, although Powell is not expected to give explicit guidance on a interest rate reduction.
Broader Asian currencies fell as markets weighed the prospect of an expiring carry trade against prospects for lower US yields.
The Chinese yuan pair held steady at around 7.1328 yuan, following a slightly stronger midpoint fix from the People’s Bank. The central bank had also left its key lending interest rate unchanged on Tuesday.
The South Korean won pair rose 0.5%, while the Singapore dollar pair was flat.
The Australian dollar pair rose 0.1% after minutes of the Reserve Bank’s August meeting showed the central bank is still considering a rate hike amid persistent inflation.
The Indian rupee pair rose 0.1%, staying within sight of recent record highs.
