Softer USD and commodity EM FX gains
Softer USD as Fed rate hikes pricing pared.
Group Research - Econs, Chang Wei Liang18 Aug 2026
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USD/JPY has been stable around 159, despite softer than expected Q2 growth in Japan. Preliminary GDP came in at 0.3% q/q in Q2 (prev: 0.5%), and is a tad lower than analyst expectations of 0.5%. Growth was weighed by softer household and business spending, but also temporary factors such as school subsidies, which dampened consumption. Exports remained resilient, supported by the AI boom in semiconductors and solid demand for Japanese vehicles in the US. Markets have brought forward expectations for a rate hike to the coming policy meeting in Sep, in part due to a policy desire to help stabilize the JPY. Japan’s July CPI this Friday will thus be on focus.

USD continues to soften, with the DXY falling to mid-99 levels, marking its lowest in three months. A weaker USD is largely due to markets paring back expectations of Fed rate hikes this year given lacklustre US economic data. Besides disappointing payrolls, US July retail sales released last Friday show a decline of 0.6% m/m in July, disappointing expectations. Markets have thus repriced a Sep rate hike to a mere 35% chance, down from 75% late last month. We would still monitor oil prices, particularly after Trump announced this morning that the US is not seeking to extend its MoU with Iran, which technically expires tomorrow. A rally in oil on renewed Middle East uncertainty could bolster inflation expectations.

EM currencies have also benefited from lesser Fed rate hike expectations. Across EM FX, the MYR is the best performer this week with USD/MYR slipping around 0.7% to 4.06. MYR has even outpaced North Asian currencies such as KRW, which are benefiting from strong semiconductor demand due to AI. More generally across EMs, currencies of commodity exporters with good carry have been popular with investors, supported by low FX volatility and elevated oil prices.

Chang Wei Liang

FX & Credit Strategist
weiliangchang@dbs.com



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