Investing.com – Most Asian currencies weakened on Friday, while the dollar extended overnight gains as signs of continued economic weakness in China largely offset optimism about easing U.S. inflation and interest rates.
Purchasing managers’ index (PMI) data from China showed a slight improvement in business activity in February, indicating that the recovery in Asia’s largest economy remains sluggish.
The idea kept sentiment on edge in regional currency markets, even as traders began pricing in a slightly higher chance of a U.S. rate cut following one-day inflation data.
Chinese yuan falls amid mixed PMI
The index fell 0.1% on Friday and remained near recent three-month lows.
Official PMI data showed China contracted for the fifth month in a row in February. The weak performance largely offset data showing some improvement in economic activity, although the increase was largely due to higher consumer spending during the Lunar New Year holiday – a trend that could fade in the coming months.
A separate private survey showed China’s economy grew in February. However, official data showed China’s largest manufacturing companies remain under pressure from weak domestic and overseas demand.
Dollar strong as PCE data doesn’t encourage rate cut positioning
Both indexes fell slightly in Asian trading on Friday but held on to most of their gains overnight after data showed inflation fell as expected in January.
The Fed’s inflation gauge fell in January but remained well above the central bank’s annual inflation target.
“Due to the rapid fall in PCE inflation in the fourth quarter of last year, there is some potential for a temporary outlier in the data and the Fed could still cut rates this summer. However, if data remains strong through March, the Fed may have to reconsider how long rates will remain high,” ANZ analysts wrote in a note.
Published traders still estimate a greater than 30% chance of the rate remaining in June, as well as a 56% chance that the Fed will cut rates by 25 basis points.
Most other Asian currencies were muted on Friday. It gave up all its gains on Thursday to trade above the 150 level again as the prospect of higher, longer-term US rates largely overshadowed any early rate hikes by the Bank of Japan.
The gain was 0.3% after two days of losses as investors bet the Reserve Bank would not raise interest rates again.
Attention was also focused on key documents due out next week.
The index remained unchanged while continuing to moderate gains on Thursday after data showed growth in the December quarter was much stronger than expected, underscoring India’s position as the fastest-growing major economy.