Asia FX muted, dollar heads for fourth straight week of gains

Most Asian currencies remained relatively stable on Friday, while the U.S. dollar was on track for a fourth consecutive week of gains as investors grew increasingly confident that the Federal Reserve would raise interest rates again by the end of 2026. The Japanese yen experienced a slight dip due to data indicating a decline in household spending for the ninth consecutive month in August, but the South Korean won held steady in holiday-thinned trading.

Anticipation of U.S. consumer sentiment and inflation expectations data added a degree of caution, while a drop in oil prices provided minimal relief. Treasury yields had cooled this week, relieving some pressure on Asian currencies as a bond market rout came to a halt. However, yields were still near multi-decade peaks. Investors also closely monitored the Japanese yen's USD/JPY pair, which rose 0.1% after government data showed a 3.1% annual decline in household spending, below estimates of 3.5% growth.

Similarly, the Chinese yuan's USD/CNY pair fell 0.07%, while the Singapore dollar's USD/SGD pair edged down by 0.09%. The Australian dollar's AUD/USD pair gained 0.2%, while the Indian rupee's USD/INR pair rose 0.2% and was nearing a record high of 97 rupees, buoyed by higher oil prices. Despite a 25-basis point interest rate hike earlier this week by the Reserve Bank of India, concerns over inflation continued to weigh on the currency.

The Federal Reserve's hawkish stance, as indicated by minutes from their September meeting, raised expectations of another 25-basis point rate hike in December, while markets priced in a lower likelihood of a hike in October. As such, the dollar index and dollar index futures both fell 0.1% on Friday, though the greenback was still poised for a 0.1% increase this week, marking its fourth consecutive weekly gain.