US Dollar Rises, Asian Currencies Face Pressure Amid FX Volatility

Key Takeaway

• The US dollar's strength, driven by rising yields and anticipated weaker Chinese yuan, is pressuring Asian currencies.
• Upcoming US CPI data and FOMC meeting are key events that could increase FX volatility, with markets eyeing a potential December rate cut.
• European political instability has weakened the euro, adding to global FX market volatility.

US Dollar Strength

The US dollar continues to show robust strength, driven by increasing US yields. This trend is putting significant pressure on Asian currencies. The anticipated weaker Chinese yuan (CNY) fixing, as Chinese policymakers return from holidays to address recent market shifts, is expected to further amplify regional currency weakness. The Bloomberg Dollar Spot Index has risen for the third consecutive day, with the Treasury 10-year yield adding a basis point to near 4.45%.

The Mexican peso (MXN) has also experienced a slide following comments from president-elect Sheinbaum. This serves as a cautionary example for other currencies as FX traders look ahead to Wednesday’s double whammy of US Consumer Price Index (CPI) data and the Federal Reserve policy decision. These events are expected to validate recent market moves and could exacerbate FX volatility.

Asian FX Volatility

Asian foreign exchange markets are likely to face increased volatility this week due to a selloff in US Treasuries. The upcoming US CPI data and the Federal Open Market Committee (FOMC) meeting are key events that traders are closely monitoring. The market is currently leaning towards a US interest rate cut in December, and the Fed's dot plot will reveal how recent data has influenced official thinking.

Japan’s yen remains vulnerable as the Bank of Japan (BOJ) policy meeting may discuss scaling back bond-buying operations and potentially hint at a July rate hike. While these moves could support the yen, its trajectory will ultimately depend on the FOMC's decisions. In India, the reappointment of Prime Minister Narendra Modi is expected to further stabilize the nation’s assets. Foreign investors are looking for continued commitment to economic reforms and a pro-growth agenda. Data as of June 6 indicates that investors remain cautious on equities, but bond market flows and currency stability are positive signs.

European Political Impact

The euro has slipped to its lowest level against the dollar in about a month following the weekend’s parliamentary elections in France and Germany. French bond futures have declined after President Emmanuel Macron called a snap legislative ballot. Euro Stoxx 50 futures are about 0.4% softer, while S&P futures and Nasdaq contracts remain steady.

The political upheaval in Europe is adding to the volatility in the FX markets. Voters in France and Germany dealt a significant blow to their leaders in the European Parliament elections, leading to increased uncertainty. This political instability is contributing to the euro's weakness and is likely to have a ripple effect on other currencies.