Asian Currencies Caught Between Soft Inflation and Hawkish Fed

Most Asian currencies were flat on Friday as investors weighed signs of softening U.S. inflation against comments from Federal Reserve officials that suggested more interest rate hikes were likely.

China’s yuan was largely unchanged around 6.7361 to the dollar, while the Indian rupee and Singapore dollar also traded sideways.

Sentiment towards China was rattled by a new lockdown in industrial hub Yiwu, as well as parts of the Hainan province. A series of COVID-related lockdowns have severely dented economic growth in China this year.

Focus is now on key Chinese industrial production and retail sales data due next week to gauge the strength of the economy.

Broader sentiment in Asia was muted as investors digested data showing that both U.S. consumer and producer price inflation softened through July.

But overnight comments from Fed officials suggested that the bank would keep hiking rates until inflation came back within its targeted annual rate of 2%. CPI inflation stood at 8.5% as of July.

San Francisco Fed President Mary Daly said on Thursday that she was open to a 75 basis point hike in September, stating that the central bank has a long way to go before inflation is tamed, Reuters reported.

Even as a growing number of traders are positioning for a smaller, 50 basis point hike by the Fed during its September meeting, U.S. Treasury yields rose overnight.

The dollar index rose 0.1% as of 01:24 ET (05:24 GMT), while dollar index futures were unchanged. The greenback was set to lose 1.4% this week.

The Malaysian ringgit rose 0.1% on Friday after the country’s economy expanded 8.9% in the second quarter, blazing past estimates for an expansion of 6.7%. The reading ranks Malaysia among the fastest growing Southeast Asian economies in the second quarter this year, as strength in manufacturing helped it avoid headwinds from slowing global growth.