Most Asian currencies moved in limited ranges on Thursday while the U.S. dollar stayed largely unchanged as investors digested two intersecting developments: fresh U.S. strikes on Iranian targets and a hotter-than-anticipated U.S. inflation report for May.
The US Dollar Index hovered near the 100 level as of 00:11 ET (04:11 GMT), holding onto recent gains near a two-month high. That steadiness in the dollar coincided with generally muted action across regional FX markets.
Geopolitical tensions keep risk appetite fragile
Risk sentiment was subdued after U.S. forces carried out additional strikes against Iranian targets overnight. Tehran announced a halt to vessel traffic through the Strait of Hormuz, a critical energy shipping artery, in response to the escalation. Oil prices rose sharply on the news and traders stayed cautious across currency markets as the situation unfolded.
Against that backdrop, major Asian pairs showed little movement. The USD/JPY rate was largely unchanged at 160.52 yen, remaining above the 160 level that prompted official intervention by Japanese authorities in April. Market participants are now looking toward the Bank of Japan's upcoming policy meeting, where markets widely expect policymakers to lift the policy rate to 1.0% as inflation remains above the central bank's target.
The BOJ also said Governor Kazuo Ueda had been hospitalized for medical treatment and would miss the June 15-16 meeting.
Elsewhere, the onshore Chinese yuan's USD/CNY pair traded flat, while the South Korean won's USD/KRW inched about 0.2% higher. The Indian rupee's USD/INR and the Australian dollar's AUD/USD each showed limited movement as traders weighed geopolitical and macroeconomic signals. The Singapore dollar's USD/SGD was also little changed.
U.S. inflation data factors into Fed outlook
U.S. consumer prices accelerated in May, a development that reinforced expectations that the Federal Reserve could keep interest rates elevated for longer. Headline consumer prices rose at their fastest annual pace in more than three years, a rise driven largely by higher energy costs linked to the worsening Middle East conflict.
Core CPI, which strips out volatile food and energy components, gained 0.2% over the month after a 0.4% increase in April. ING analysts noted that while headline inflation was pushed up by sharp gasoline and airline fare increases, many other components were steadier, resulting in a softer-than-anticipated core print. They added that June's inflation rate should be pulled lower by a reversal in gasoline, but cautioned that inflation remains vulnerable to ongoing volatility in energy costs.
Market participants now expect at least one Fed rate hike before year-end. Investors are awaiting U.S. producer price data and weekly jobless claims later in the day for additional information on the inflation trajectory and the likely path of Federal Reserve policy.
What this means for markets
The combination of geopolitical escalation in the Middle East and firmer U.S. inflation has left currency markets in a cautious, risk-off posture, with the dollar supported by safe-haven flows and the prospect of a prolonged period of higher U.S. interest rates. Asian currencies broadly traded in narrow ranges as traders awaited further developments on both the geopolitical and macroeconomic fronts.