Chinese Yuan Falls, Asia FX Curbs Losses as Dollar Rally Pauses

Most Asian currencies rose slightly on Tuesday as the dollar paused its rally below 20-year highs, while the Chinese yuan fell to a new two-year low on more signs of economic weakness in the country.

The Japanese yen and Indian rupee strengthened 0.3% each, while the Singapore dollar rose 0.2%. In the Asia-Pacific region, the New Zealand dollar was the best performer with a 0.7% jump after Central Bank Governor Adrian Orr said the bank is likely to tighten monetary policy further this year.

Asian markets stabilized as the dollar retreated from a 20-year peak after rallying strongly for the past seven sessions. The dollar index fell 0.4% to 113.71, while dollar index futures shed 0.3%.

Weakness in the dollar also allowed currencies outside Asia to recover. The British pound jumped 0.9% from a record low, while the euro added 0.4%, recovering from a 22-year low.

Still, sentiment remained on edge over further gains in the dollar and U.S. Treasury yields, amid increasing concerns over a global recession. Asset classes across the board were battered by a slew of weak economic readings last week, which drove safe haven plays into the dollar.

The prospect of rising U.S. interest rates is also set to weigh further on Asian currencies, as the gap between risky and low-risk debt narrows. Asian currencies slumped in value this year after a series of sharp interest rate hikes by the Federal Reserve.

The central bank recently indicated that its benchmark rate will end the year well above 4%.

China’s yuan was among the few outliers for the day, falling 0.2% and trading just below a two-year low of 7.1699. Losses in the yuan came after data showed Chinese industrial profits fell for a second consecutive month in August, amid continued disruptions from COVID-related lockdowns.

A weakening yuan has also weighed heavily on Chinese manufacturing activity, by making raw material imports more expensive.

A slowdown in China’s economy this year has also impacted sentiment towards Asia, given the country’s status as a major trading hub for the region.

But growth in the country may improve in the remainder of the year with the lifting of COVID restrictions and fresh stimulus measures from the government.