"Tariff Rulings and Fed Signals Keep Asia FX in Wait-and-See Mode"

Asia FX markets experienced subdued trading on Monday as investors remained cautious ahead of key U.S. economic data and the upcoming Federal Reserve policy meeting. The focus was on the potential for a Fed rate cut, with the CME FedWatch tool indicating an 89% probability of a 25-basis-point cut at the September 16-17 meeting. This expectation was reinforced following Fed Chair Jerome Powell’s remarks at the Jackson Hole symposium, where he signaled openness to easing policy if inflation and labor market conditions continued to moderate [1].

The U.S. Dollar Index, which tracks the dollar against a basket of six major currencies, edged down slightly in Asia hours but remained largely unchanged compared to the previous week [1]. Limited volatility in the FX market reflected cautious positioning amid uncertainty over the timing and magnitude of U.S. monetary easing. Investors were also monitoring Friday’s nonfarm payrolls report, seen as a key determinant of the Fed’s decision.

Regional economic indicators provided mixed signals. In Japan, factory activity contracted in August, according to a private survey, with falling export orders attributed to the impact of U.S. tariffs on the export-dependent manufacturing sector [1]. Meanwhile, China’s official manufacturing PMI for August stood at 49.4, slightly below expectations and indicating continued contraction, though private-sector data suggested a faster rate of expansion. The Services PMI for China was in line with forecasts at 50.3 [2].

The Chinese yuan remained stable in onshore trade but edged higher in offshore markets, with USD/CNH rising 0.1%. In India, the rupee hovered near record levels, with USD/INR trading at 88.25, close to its recent high of 88.31. South Korea’s won and Australia’s dollar showed modest gains, at 0.3% and 0.1% respectively, amid regional risk-on sentiment [1].

The U.S. legal challenge to President Trump’s tariffs added another layer of uncertainty, with a federal appeals court ruling most of the tariffs illegal. Analysts noted that if upheld, the ruling could reduce inflationary pressures and potentially ease the Fed’s policy path. The impact on the dollar could be significant, particularly if the tariffs were rolled back. Historical analysis suggested that the original tariffs added approximately 0.5 percentage points to headline inflation, so their removal would have a notable effect on the bond and currency markets [2].

Political developments also raised questions about the Fed’s independence, following Trump’s attempt to remove Federal Reserve Governor Lisa Cook, a move that she is challenging in court. These tensions underscore the complex environment facing U.S. monetary policy and could influence market expectations in the run-up to the Fed’s September meeting.

Overall, Asia’s FX landscape remains in a holding pattern as traders await clarity on Fed policy and regional economic data. The upcoming U.S. payrolls report will be a crucial event, with potential to trigger sharper moves in currency markets if the data supports a cut [1].

Source:

[1] Asia FX, dollar subdued as traders gauge Fed easing bets (https://www.investing.com/news/forex-news/asia-fx-dollar-subdued-as-traders-gauge-fed-easing-bets-regional-pmis-in-focus-4217725)

[2] Asia's economic updates show China's manufacturing PMI at 49.4 with US tariff news emerging (https://www.vtmarkets.com/live-updates/asias-economic-updates-show-chinas-manufacturing-pmi-at-49-4-with-us-tariff-news-emerging/)