Asian Currencies Strengthen Amid Dollar Weakness and Chinese Stimulus Expectations

WHAT YOU SHOULD KNOW

Asian currencies firm up due to a weakened dollar and optimism about Chinese stimulus measures.
The Chinese yuan rises after officials vow to step up stimulus efforts and stabilize the currency.
The Federal Reserve meeting is anticipated to result in a rate hike, but uncertainty remains about the future rate policy.

On Tuesday, most Asian currencies strengthened, benefiting from a combination of dollar weakness and optimistic expectations of further Chinese stimulus. Investors’ attention is now turning towards the upcoming Federal Reserve meeting. Weak U.S. business activity data released overnight led to increased speculations that the Federal Reserve might have limited room to continue raising interest rates, just ahead of the two-day meeting that commenced on Tuesday. As a result, the dollar declined in Asian trade after a brief rebound from 15-month lows, with both the dollar index and dollar index futures falling by around 0.1%.

The Chinese yuan saw a significant increase of 0.4% on Tuesday, rebounding sharply from the level of 7.2 against the dollar seen earlier that week. This boost was aided by a notably stronger daily midpoint fix set by the People’s Bank of China. Reports indicated that Chinese state banks were once again selling dollars to support the yuan. Officials from the Politburo, the top decision-making body of the Communist Party, raised sentiment towards China by pledging to intensify stimulus measures to support economic recovery. They also emphasized efforts to stabilize the yuan, which experienced a 4% decline against the dollar this year. Despite positive implications for the Chinese economy, the increased liquidity from stimulus measures could potentially exert more pressure on the yuan if the People’s Bank of China further reduces interest rates.

Other Asian currencies also made gains on Tuesday. The Japanese yen increased by 0.1% ahead of the Bank of Japan meeting later in the week, while the Indonesian rupiah remained flat in anticipation of a Bank Indonesia meeting later that day. The Australian dollar rose by 0.3%, the Indian rupee reached an over two-month high with a 0.1% increase, and the South Korean won rose by 0.1% following data showing better-than-expected growth in the country’s economy during the second quarter.

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