Asia FX slips ahead of Fed minutes, dollar strengthens

Most Asian currencies retreated on Wednesday amid more weak economic indicators, while the dollar firmed as markets awaited more cues on U.S. monetary policy from the minutes of the Federal Reserve’s June meeting.

Softer-than-expected service sector readings from China, Japan, and Australia dented appetite for risk-exposed assets, as did increased fears of a renewed trade war between Washington and Beijing.

Chinese yuan sinks after weak PMI, trade war fears increase
The yuan was among the worst-performing currencies for the day, down 0.3% and hovering near its worst levels in eight months.

A private survey showed on Wednesday that China’s service sector grew less than expected in June, with local and foreign demand for Chinese goods remaining weak.

The reading followed recent data that showed a sustained slowdown in China’s manufacturing sector, raising more doubts over an economic recovery in the country.

Analysts called for more stimulus measures from Beijing to support a recovery, which are likely to increase local liquidity conditions and further weigh on the yuan.

In addition to the weak economic data, China also introduced export curbs on key chipmaking materials to the U.S., raising concerns over worsening trade relations between the world’s largest economies.

Concerns over China weighed on most Asian currencies, with the Taiwan dollar down 0.2%, while the South Korean won slid 0.6%.

The Australian dollar fell 0.1%, having shrugged off a Reserve Bank decision to keep interest rates steady this week. But the currency was hit by weaker-than-expected service sector growth data for June.

The Japanese yen fell slightly to the dollar, and remained within sight of the 145 level, which analysts said could invite fresh intervention in currency markets by the government to support the yen.

Recent weakness in the yen prompted repeated warnings from Japanese officials that they could potentially intervene and defend the Japanese currency.

Dollar boosted by safe haven demand, Fed minutes in focus
The dollar strengthened in Asian trade, benefiting from increased safe haven demand, while traders also built positions in the greenback ahead of the Fed minutes due later in the day.

The dollar index and dollar index futures rose about 0.1% each. The Fed minutes are expected to shed more light on the central bank’s plans for interest rates this year, after it held rates steady in June but flagged at least two more hikes later in the year.

The prospect of rising U.S. rates bodes poorly for Asian markets, as the gap between risky and low-risk yields narrows.