Warning from the International Monetary Fund (IMF)

The dollar’s recovery appeared to have peaked on Wednesday, as most Asian currencies saw modest gains as markets awaited fresh indications on U.S. monetary policy from the minutes of the Federal Reserve’s December meeting.

A warning from the International Monetary Fund (IMF) about a future recession and worries over an increase in COVID-19 cases in China combined to put pressure on regional currencies on Tuesday.

In response, the dollar increased in value by more than 1% versus a basket of other currencies, leading most Asian currencies to lose ground gained at the start of the year. On Wednesday, though, a dollar rise appeared to have petered out, helping regional units. On Wednesday, the Chinese yuan increased 0.2%. Although it traded below a seven-month high reached versus the dollar on Tuesday, the Japanese yen increased by 0.3%.

According to data from Japan, manufacturing activity decreased for a second consecutive month as domestic companies struggled with out-of-control inflation and weak global demand.

While marginally down, the dollar index and dollar index futures held onto much of their recent gains and were trading just below a two-week high. Markets are eager to learn if more officials supported the Federal Reserve’s decision to pause the rate hikes in the upcoming months by reading the minutes of its December meeting.

The probability that the Fed would tone down its hawkish rhetoric and raise rates by an even lower 25 basis points in February is currently above 90%, according to the markets. This occurs at a time when there are more and more indications that US inflation has peaked.

However, because U.S. inflation is still forecast to rise beyond the Fed’s annual goal range, the institution is widely anticipated to maintain its current monetary policy in the coming months.

Broader Asian currencies were slightly up, and markets were preparing for important business activity and nonfarm payrolls data due this week in the United States. Markets were closely observing any economic readings from major economies after the IMF issued a warning about a probable recession.

After President Xi Jinping adopted a more circumspect stance in his new year’s address than the markets had anticipated, attention turned to China’s COVID-19 dilemma. Following the easing of several anti-COVID measures in December, the nation is currently dealing with a significant increase of infections.