Asian FX is an important driver of USD, says ING

Attention for the dollar this week has turned to the run-up in USD/Asia and what local authorities are prepared to do about it, wrote analysts at ING. This follows the dollar's surge on strong March CPI and retail sales data over the last week.

"Earlier this week we discussed how the trade-weighted renminbi had rallied 1.5% recently as global currencies depreciated against the dollar while the PBOC had held the line in USD/CNY. Since then, PBOC fixings have been steady, just above 7.10 - but the issue of whether China will allow some catch-up depreciation in the renminbi remains a hot one," said Frantisek Taborsky, ING EMEA FX & FI Strategist.

"At the other end of the spectrum are those currencies that have fallen heavily. Recent weakness in the Japanese yen and Korean won has elicited quite a response from local finance ministries. In fact, yesterday saw the first-ever trilateral meeting of the finance ministers from Japan, Korea and the US. The press release saw Japan and Korea express 'serious concerns' about the recent sharp depreciation of the yen and won."

Taborsky added, "It may be too much to read into this a US sign-off on Asian FX intervention, but this new coordination between Japan and Korea does raise the prospect that both could intervene at the same time - were USD/JPY and USD/KRW to be trading through, say, 155 and 1400 respectively in a disorderly manner. Recently, USD/JPY and USD/KRW one month traded FX volatility has been on the high side, near 10% and 9%, respectively. For reference, when the Bank of Japan last intervened in September/October 2022, it sold $70bn. And Bank of Korea FX Market Stabilization data shows the BoK in the FX market for anywhere between $2bn and $6bn per quarter last year."

"Any large-scale FX intervention could temporarily slow the dollar's advance, although a reversal is going to require quite a change in current conditions. Here, Fed hawks, such as Michelle Bowman, last night hinted that the Fed might need to hike rates. And the real prospect of escalation in the Middle East will also keep the dollar in demand."

"For today, the US calendar is relatively light - just weekly jobless claims and existing home sales. But there are plenty of Fed speakers today. It will be interesting to see whether any comment on a subject introduced in last night's Beige Book that businesses ability to pass cost increases onto consumers had 'weakened considerably' - music to the ears of Fed doves."

ING sees some shallow consolidation in DXY - perhaps holding the 105.50/60 level - before the bull trend resumes.

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