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Asia FX Takes a Hit as China’s GDP Softens, Dollar Holds Steady

It was a rough Monday for most Asian currencies as they followed China’s discouraging economic signals, while the dollar remained stable amid ongoing speculation about U.S. interest rates.

China’s Gross Domestic Product (GDP) data confirmed the waning momentum in Asia’s largest economy, signaling a potential need for more stimulus measures from Beijing.

The report also highlighted short-term weaknesses in the Asian economy, prompting investors to secure profits generated from recent currency strength. Additionally, trading volumes were relatively subdued due to a Japanese market holiday.

In Asian trade, both the dollar index and dollar index futures stabilized after significant losses last week, inching closer to the 100 level.

Data released on Friday revealed resilient U.S. consumer sentiment throughout June, fueling concerns that this trend could sustain sticky inflation and a hawkish stance from the Federal Reserve.

However, considerably softer-than-anticipated U.S. inflation readings left markets questioning how far the Fed could continue raising interest rates.

Chinese Yuan Slides Amid Disappointing GDP Figures

The Chinese yuan emerged as one of the weakest performers of the day, declining by 0.4% following data that indicated a slowdown in Chinese economic growth during the second quarter.

GDP only grew by 0.8% in Q2 compared to the previous quarter, falling short of growth expectations from the same period last year.

These figures revealed that China struggled to maintain the robust economic momentum witnessed in Q1, suggesting the likelihood of further stimulus measures from the government to bolster growth in the upcoming months. Consequently, this prospect exerted downward pressure on the yuan.

On Monday, the People’s Bank of China decided to keep medium-term lending rates unchanged, which likely hints at a similar action for the benchmark loan prime rate (LPR) later this week. In June, the central bank reduced the LPR to stimulate growth.

Concerns regarding China’s situation spilled over to other currencies, leading to a 0.4% drop in the Australian dollar, which heavily depends on trade with China. The Taiwan dollar experienced a 0.6% decline, while the Malaysian ringgit suffered the most significant losses across Southeast Asia, with a 0.6% decrease.

The Japanese yen remained stable in offshore trade.

Focus on the Fed and Rate Hikes

Despite most Asian currencies enjoying strong gains in the previous week, the dollar remained near 15-month lows after weaker-than-expected U.S. inflation data for June was released.

This revelation sparked speculation that the Federal Reserve is nearing its peak interest rates, with the anticipated rate hike in late July potentially being the central bank’s last for the year.

However, even if the Fed pauses after July, the gains for Asian currencies are projected to be limited due to the expectation of higher U.S. rates in the long run.

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