Asian currencies mixed as dollar holds two-month high, yen stays near lows

Asian currencies saw mixed trading on Thursday as the U.S. dollar approached a two-month high, buoyed by robust U.S. economic data and inflation concerns. Meanwhile, the Japanese yen struggled near a three-week low following the country's return from holidays. Meanwhile, South Korean markets remained closed for the Chuseok holiday.

The U.S. dollar index stood at around 101.09, having peaked at 101.2 earlier in the session. The USD/JPY pair slipped 0.2% to 157.94, hinting at a near three-week low for the yen. This move came after a stronger-than-expected U.S. manufacturing reading reignited inflation worries, prompting speculation of future Federal Reserve rate hikes.

Fed Governor Michael Barr suggested that a robust economy and rising inflation could necessitate additional rate increases, potentially leading to an October hike. This sentiment pushed the five-year Treasury yield above 5% for the first time since 2007. Additionally, the CME FedWatch tool now projects a 70% probability of a rate increase in October, up from roughly 50% a week prior.

Oil prices contributed to inflationary pressures, with Brent crude settling near $103 a barrel, up almost 4% from Wednesday. This increase was driven by Iran's defiant stance, coupled with U.S. efforts to curb diesel exports. Iran also vowed not to permit freedom of navigation through the Strait of Hormuz, while ongoing U.S. sanctions and a naval blockade exacerbated energy supply uncertainty.

Despite Japan's markets reopening Thursday, the 10-year Japanese government bond yield jumped to around 3.06%, its highest level in three decades. Even with this rise, the yen remained under pressure as traders gauged whether the Bank of Japan's recent rate hike was sufficiently hawkish. The USD/JPY pair was quoted at 157.94. Traders remain vigilant for potential BOJ intervention, though they judged the rate hike as lacking sufficient weight in the tightening narrative.

Meanwhile, Japan's flash manufacturing PMI slipped to 54.1 in September from 54.9 in August, while South Korea's won weakened, with the USD/KRW pair rising 0.5% to 1,372.1. South Korean stock markets were absent on Thursday due to the Chuseok holiday, set to remain closed on Friday. Meanwhile, the Australian dollar stood around $0.70, and the New Zealand dollar was at $0.57.

The USD/AUD pair edged up 0.1%, and the USD/SGD pair marginally rose to 1.2801. The Indonesian rupiah was among the weaker regional currencies, with the USD/IDR pair climbing 0.6% to 17,903.5. Bank Indonesia maintained its benchmark rate at 5.75% on Wednesday, as expected, stating it would continue utilizing exchange-rate stabilization measures and incentives for foreign inflows.

The Indian rupee showed slight firmness, with the USD/INR pair dropping 0.02% to 95.915. The Reserve Bank of India has been reducing surplus banking liquidity through bond sales and foreign-exchange swaps, aiming to curb the risk of excess cash fueling inflation. The Chinese yuan faced some pressure following its recent rally, with the USD/CNH pair gaining 0.1% to 6.72, and the USD/CNY pair rising 0.1% to 6.71.

The yuan's trajectory remains tied to the upcoming meeting between U.S. President Donald Trump and Chinese President Xi Jinping, where a trade truce is set to be extended for another two months, pending negotiations over artificial intelligence, rare-earth exports, U.S. aircraft purchases, and agricultural goods.