Asian currencies muted as Gulf concerns offset weaker dollar

The US Dollar Index was little changed near 100.5, holding close to its weakest level in nearly a month after dropping sharply over the previous two sessions

Most Asian currencies traded in narrow ranges on Thursday as weakness in the U.S. currency was offset by persistent caution over the escalating conflict in the Middle East, leaving investors reluctant to take new positions in riskier assets.

The Middle East conflict intensified after the U.S. launched strikes on Iran and Tehran reiterated that control of the Strait of Hormuz was central to its security, raising the prospect of further disruptions to world energy supplies.

The US Dollar Index was little changed near 100.5, holding close to its weakest level in nearly a month after dropping sharply over the previous two sessions.

The USD/KRW pair was little changed around 1,485 won, after the Bank of Korea delivered its first interest-rate increase in three-and-a-half years, raising its benchmark rate by 25 basis points to 2.75% while signalling that further policy tightening remains possible as inflation stays elevated.

Yen also remained in focus. The USD/JPY pair edged lower to around 162.1 yen, with traders remaining alert for possible intervention after recent comments from Finance Minister Satsuki Katayama regarding potential reviews of Government Pension Investment Fund asset allocations.

The USD/AUD pair edged slightly higher as the Australian dollar eased, while the USD/NZD pair also ticked up marginally, with the New Zealand dollar giving back some recent gains after outperforming earlier this week on a 25 basis point interest rate hike.

Yuan showed little reaction despite the weaker dollar, after mixed economic data and latest comments from the People’s Bank of China reinforced expectations that policymakers are comfortable with a broadly stable exchange rate rather than a sharp appreciation.

The USD/CNY pair was little changed around 6.77 yuan, while offshore USD/CNH also held broadly steady, reflecting muted market reaction even after the PBOC set its daily midpoint at its strongest level since April.

China’s economy expanded 4.3% year-on-year in the second quarter, missing expectations and marking its weakest pace in more than three years. The disappointing reading reinforced concerns over slowing growth in the world’s second largest economy, which remains the region’s biggest trading partner and a key source of demand for exports across North Asia and Southeast Asia.

The softer growth print also strengthened expectations for additional policy support from Beijing, although that offered little immediate support to the yuan.