Chinese and Japanese authorities are intensifying their efforts to defend their currencies against the rising dollar, threatening to exacerbate inflationary pressures. On Wednesday, Japan issued a strong warning about the rapid decline of the yen, with the highest-ranking currency official stating that the country was prepared to act against speculative market movements.
Shortly after that, the Chinese central bank issued its most forceful directives ever regarding its daily reference rate for the yuan, as the currency weakened to levels not seen since 2007.

Both currencies have been under pressure from the dollar’s overall strength in recent months. The yen has fallen by nearly 8% against the greenback since mid-July, while the yuan has declined by more than 6% since May.

Signs of resilience in the U.S. economy have convinced investors that the Federal Reserve will keep interest rates high longer than expected or even raise them. This has contributed to a roughly 5% increase in the Bloomberg Dollar Spot Index since its July low, while an indicator of Asian currencies has reached its lowest level since November.

High oil prices have also revived concerns about rising inflation, which undermines expectations. Asian central banks have finished raising interest rates, reducing the appeal of local currency bonds. Based on disappointing data for months, China’s bleak economic prospects are also weighing on sentiment towards emerging market currencies.
Specifically, emerging Asian countries are more vulnerable to the dollar’s strength due to a much lower interest rate differential and greater exposure to weaker Chinese growth prospects.

Signs are emerging that the dollar could extend its gains if bets against the currency, which were consistently accumulated as it weakened earlier this year, were suddenly reversed. According to CFTC data, long positions in non-commercial futures contracts are close to their lowest level in over two years.