Asian Currencies Weaken as Dollar Rebounds Amid Middle East Uncertainty and Japan Inflation Data

Most Asian currencies declined on Tuesday as mixed signals surrounding the Middle East conflict, a recovering U.S. dollar, and softer Japanese inflation data weighed on regional markets. Investors remained cautious as geopolitical developments continued to drive volatility across forex markets.

The U.S. Dollar Index climbed 0.5%, recovering from losses in the previous session, while Dollar Index Futures also edged 0.5% higher during early Asian trading hours. The dollar's rebound followed conflicting reports about diplomatic progress between Washington and Tehran. U.S. President Donald Trump claimed that talks with Iran were "very good and productive" and indicated a temporary pause in strikes on Iranian energy infrastructure. However, Iran flatly denied that any such negotiations had taken place, quickly reversing earlier optimism and keeping uncertainty elevated in global markets.

As the dollar strengthened, regional currencies broadly sold off. The South Korean won was among the hardest hit, with the USD/KRW pair surging 1%. The Indian rupee slipped 0.4%, with the USD/INR pair rising to 85.54, remaining close to its record high of 86.12 touched in the prior session. The Chinese yuan edged 0.2% lower against the dollar, while the Singapore dollar weakened by 0.3%. The Australian dollar dropped 0.6%, whereas the Japanese yen saw a modest 0.1% decline.

Adding further pressure on Asian markets, Japan's latest economic data disappointed. Core inflation fell below the Bank of Japan's 2% target, while the flash manufacturing PMI eased to 51.4 in March from 53.0, pointing to slowing factory activity. These figures reinforced expectations that the BOJ would adopt a cautious approach to future interest rate hikes. Analysts at ING noted that while the recent inflation dip may be temporary, the timing of any potential April rate hike could shift depending on how the Middle East situation unfolds.