Asian currencies largely remained steady on Thursday, with the Japanese yen trading close to 18-month lows driven by emerging concerns over a possible sudden election. Concurrently, the South Korean won reversed previous sharp advances triggered by verbal endorsement from a U.S. Treasury official.
The U.S. Dollar Index was mostly unchanged, holding levels near a one-month peak, while futures in the dollar currency index also saw minimal variation as of early GMT hours.
Yen Pressure Linked to Election Speculation
The yen experienced some overnight strengthening, with the USD/JPY exchange rate dropping 0.4%. Nevertheless, on Thursday it modestly rose by 0.1%, remaining near its highest point in about 18 months. The currency's recent weakness is attributed to market anticipation that Prime Minister Sanae Takaichi could call an early snap election as soon as February.
Investor sentiment has viewed Takaichi's potential leadership as unfavorable for the yen, given her advocacy for expansive fiscal policies involving increased public spending and a continuation of accommodative monetary policy. Market participants worry that renewed stimulus measures may hinder the Bank of Japan's efforts to tighten policy, thereby exacerbating interest rate differentials with the United States and exerting downward pressure on the yen.
Japanese authorities have issued statements cautioning against excessive fluctuations in currency valuations, which has helped provide some stability for the yen. Nonetheless, overall market mood towards the yen remains cautious and susceptible to sway.
South Korean Won Retreats Despite U.S. Treasury Backing
In South Korea, the won extended a trend of depreciation, marking declines in eight out of the last nine trading sessions. The USD/KRW pair climbed 0.7% on Thursday after sliding 0.8% in the prior session. The previous day's improvement was linked to unusual verbal support from U.S. Treasury Secretary Scott Bessent, who highlighted that the won's recent weakening did not align with the country's strong economic fundamentals.
Bessent emphasized South Korea's significant economic contributions, particularly in industries vital to the American economy, and underscored the country's importance as a key regional partner.
Separately, South Korea's central bank decided to maintain its benchmark interest rate at 2.5%, indicating a pause in its current easing cycle.
U.S. Political Remarks Influence Asian FX
Elsewhere in the region, currency markets in Asia were subdued as investors digested comments from U.S. President Donald Trump. He assured Reuters that he had no plans to dismiss Federal Reserve Chair Jerome Powell despite ongoing criminal investigations, which alleviated some concerns over the Federal Reserve's independence.
Despite this reassurance, traders remain wary about the broader policy uncertainty in Washington and its potential effects on future interest rate directions.
The Chinese yuan's onshore USD/CNY pair fell slightly by 0.1%, while the offshore USD/CNH showed little movement. The Singapore dollar saw a marginal increase against the U.S. dollar, and the Indian rupee traded without notable change. The Australian dollar also remained largely stable against the U.S. dollar on Thursday.