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Asian currencies decline, yuan near 1-year low

Asian currencies

The yuan was among the worst performers for the day after the PBOC disappointed markets with cuts to the loan prime rate

Most Asian currencies dropped on Monday, with China’s yuan leading losses following a smaller-than-expected cut from the People’s Bank, while expectation of more U.S. monetary policy signals kept the dollar stable.

The yuan was among the worst performers for the day after the PBOC disappointed markets with cuts to the loan prime rate. The move raised questions over just how much headroom China has to keep loosening policy, amid aggravating economic conditions.

Persistent concerns over higher U.S. rates also weighed on sentiment, ahead of the Jackson Hole Symposium later this week. The dollar stabilised following strong gains in the earlier week, while Treasury yields also held on to most recent gains.

The yuan dropped 0.4 per cent on Monday and was trading just above its weakest level since August 2022. The currency also surpassed the key 7.3 level to the dollar.

The People’s Bank of China cut its one-year loan prime rate by 10 bps to 3.45 per cent, while the five-year loan prime rate, which is used to determine mortgage rates, was left unchanged at 4.20 per cent. Experts expected a 15 bps cut on each count.

Both LPRs were already at their weakest points in data going back to 2013.

The move points to limited monetary support for the Chinese economy, as it struggles with a slowing post-COVID economic recovery. Given the lack of monetary support, investors are now calling on the government to roll out more targeted, fiscal measures.

But experts anticipate Beijing to hold off on any such measures, citing high levels of government debt.

Still, any further aggravation in China’s economy bodes poorly for the yuan, which is already struggling with a growing gap between local and U.S. interest rates.

Concerns over China impacted most Asian currencies. The Australian dollar and Japanese yen weakened slightly, and were both trading near nine and 10-month lows.

The South Korean won and Singapore dollar both dropped 0.1 per cent.

The Thai baht was the only exception for the day, gaining 0.7 per cent even as data showed the Southeast Asian economy gained much lesser than expected in Q2.

The dollar index and dollar index futures gained slightly in Asian trade, staying near two-month peaks.

Concerns over increasing U.S. interest rates, following strong inflation and labour market data, had supported the dollar in recent weeks, while weighing on most Asian currencies.

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