Most Asian currencies softened on Friday as bleak China factory readings knocked back investor sentiment, which had been improving on signs of progress in Sino-US trade talks and a shift by the US central bank to a more cautious stance.
China's factory activity shrank by the most in almost three years in January as new orders slumped further and output fell, a private survey showed, reinforcing fears a slowdown in the world's second-largest economy is deepening. The data overshadowed apparent progress on trade talks after US President Donald Trump said on Thursday he will meet with Chinese President Xi Jinping soon to try to seal a comprehensive trade deal as the top US negotiator reported "substantial progress" in two days of high-level talks.
China's yuan weakened 0.4 percent on Friday after the data, though it still looked set for a second week of gains against the dollar. The dollar index, a gauge of its strength versus six major peers was trading roughly unchanged, but set to fall for the week. Thailand's baht dropped 0.3 percent to 31.33 against the dollar. Data on Thursday showed exports contracted in December.
The baht is on track for a 10th straight week of gains and is the region's best performing currency. The country's central bank is set to meet late next week. "Authorities have more reasons to be wary about the ongoing currency strength while exports are poised to falter," said ING in a note on Thursday after the data was published.
Meanwhile, the rupiah rose 0.2 percent to 13,940, with the unit set to gain nearly 1 percent for the week. Markets in Malaysia were closed for a holiday. The rupee was slightly weaker at 71.125, with investors awaiting ruling party spending pledges ahead of a general election in May that may have lead to the country's fiscal deficit expanding.
"The markets will be looking out for what the budget holds whether or not there is going to be any big spending promises that will lead to a larger than expected fiscal deficit, if that happens, then that will be a negative for the rupee," said Khoon Goh, ANZ's Head of Asia Research. With the country's opposition gaining ground, the government will likely raise spending.
Along with a shortfall in tax collections, that will push the fiscal deficit up to the equivalent of 3.5 percent of gross domestic product for the year ending in March, overshooting a previous 3.3 percent target, according to one of the sources with direct knowledge of budget discussions.