US Dollar Rally Continues In Asia

The US dollar rally was the main driver in the Asian session as the greenback soared to 95.18 on growing possibilities of Federal Reserve rate increases as early as the June meeting. Bloomberg reported that the dollar’s surge since mid-2014 hurt the outlook for growth and inflation, and contributed to the Fed delaying to December its liftoff from near zero, according to strategists. Officials from Janet Yellen to Stanley Fischer have warned that the dollar’s appreciation will limit the pace of tightening.

“The Fed’s in a bind,” said Douglas Borthwick, the New York-based head of currencies at Chapdelaine & Co., a unit of the British interdealer brokerage Tullet Prebon Plc. “The Fed can’t raise rates because it means a stronger dollar, and it means deflationary pressure in the world. The Fed’s under pressure to talk a mighty game, but it can’t actually do a lot.”

Markets had dismissed a June rate hike as a five per cent possibility just last week, but rate derivatives indicated that chance jumped to about 34 per cent after the minutes were released.

Shares in Asia were choppy and shares were sliding — except in China and Japan — as many investors grow cautious about the stronger chance that U.S. interest rates will rise in June. In China, the Shanghai Composite   recently rose 0.6%, while Japan’s Nikkei Stock Average   opened higher but pared gains to recently trade about flat. But Hong Kong’s Hang Seng Index   dropped 0.4%, Korea’s Kospi   fell 0.5% and Australia’s ASX/S&P sank 0.7%.

Many investors across the Asia-Pacific region pulled back after the U.S. Federal Reserve’s April meeting minutes suggested a June interest-rate increase was still in the cards if data supported the case that the American economy was getting stronger.

The stronger US dollar weighed on Asian currencies as the Aussie fell 13 points to 0.7216 as mixed jobs data hit the wires. Unemployment has remained unchanged at 5.7 per cent, with the estimated addition of 10,800 jobs last month. Economists surveyed by Bloomberg had expected unemployment to come in at 5.8 per cent, with the addition of 12,000 jobs in April and steady participation at 64.9 per cent. Australia’s weakest growth in wages for nearly 20 years has reinforced the prospect that the Reserve Bank will be forced to cut interest rates at least once more in 2016.

 

Private sector wage rates rose by just 1.9% over the year to March, the Australian Bureau of Statistics said on Wednesday. When public sector wage increases are included, the overall figure was growth of 2% – the slowest since the data series began in 1997.

The kiwi was able to hold in the green adding 2 points to trade at 0.6742.

The Japanese yen climbed to 110.02 as traders moved between the strength of the US dollar and the better than expected GDP print on Wednesday.  Japan’s economy dodged a recession last quarter as gains in government and consumer spending compensated for a slide in business investment. Gross domestic product expanded by an annualized 1.7 percent in the first three months of this year, government figures showed Wednesday.

The October-December quarter was revised to a 1.7 percent contraction, worse than the previous estimate of a 1.1 percent drop. With private consumption making only a feeble recovery from last quarter’s slump, the data keeps alive market expectations that Prime Minister Shinzo Abe will delay a scheduled sales tax hike next year, analysts said.

The decline in capital spending suggested that companies remain reluctant to deploy their stockpiles of cash. It also underscored that Japan has a long way to go before pulling free of the cycle of expansion and contraction that has plagued the economy for decades. The leap year provided an extra day of production and spending to bolster the data, and the outlook remains challenging given the resurgent yen and the possibility of a sales-tax hike in 2017. (The Japan Times).

As the U.S. keeps up pressure on Japan not to intervene over the yen, experts will be watching what Group of Seven finance chiefs have to say about Tokyo’s readiness to sell the currency in the event that it continues rising. Finance ministers and central bankers begin a two-day meeting in Sendai on Friday at which they will discuss the world economy, sustainable development and cross-border financial flows.