Asian currencies traded in narrow ranges on Monday, as the US dollar weakened after a three-day rally in safe-haven assets. Improved risk appetite offset concerns about escalating tensions in the Middle East.

A decline in US Treasury yields following weaker inflation data last week also weighed on the dollar, even as geopolitical risks remained elevated.

Markets now look ahead to next week's Federal Reserve meeting, where futures imply an 85.6% probability that policymakers will leave interest rates unchanged.

The dollar declines: traders assess the Fed's outlook and geo-risks

Brent crude remained near $90 per barrel after the US carried out its ninth consecutive night of strikes on Iran, fueling concerns that a wider regional conflict could disrupt oil supplies and reignite inflationary pressures.

Markets continue to expect the Federal Reserve to leave interest rates unchanged at its July 29 meeting, with federal funds rate futures implying an 85.6% chance of a pause. However, Cleveland Fed President Beth Hammack warned on Friday that further policy tightening may be necessary if inflation remains persistent, reinforcing expectations that policymakers are unlikely to begin easing policy anytime soon.

The USD/JPY pair was little changed at 162.41 yen as Japanese markets were closed for the Maritime Holiday. Despite the recent selloff in Japanese equities, the yen remained at multi-decade lows against the dollar, highlighting the currency's diminishing appeal as a traditional haven asset.

"The yen's weak response to the selloff in Japanese equities raises questions about its traditional haven status in the current environment," said Tony Sycamore, senior market analyst at IG. "We continue to view the risks to the pair as to the upside, towards trend channel resistance near 166.50."

USD/CNY fell to 6.7721 yuan, while the offshore USD/CNH pair was last down 0.2% after China kept its benchmark lending rates unchanged for the 14th consecutive month, in line with expectations. This decision followed weaker-than-expected second-quarter GDP data and reinforced expectations that Beijing will continue to rely on targeted fiscal support rather than broad monetary easing.

Won Outperforms Amid South Korean Reforms; Central Bank Focus

The USD/KRW pair fell 0.5% to 1,479.98 won, making the local currency the strongest instrument in the region after South Korea unveiled its most ambitious foreign exchange market liberalization measures to date.

Starting in January 2027, overseas investors will be able to trade and transfer won through pre-registered foreign institutions without opening domestic won accounts, with settlements processed through the Bank of Korea's new 24-hour network. These measures build on the launch of 24-hour won trading earlier this month and are aimed at expanding international access to the currency. Elsewhere, the AUD/USD rose 0.1%, while the NZD/USD added 0.12% as improved risk appetite supported commodity currencies.

Currencies sensitive to oil prices remained under pressure. USD/MYR and USD/THB rose 0.3%, USD/INR rose 0.4%, USD/IDR rose 0.5%, and USD/PHP added 0.2%, reflecting lingering concerns that higher energy prices could worsen inflation and external balances in energy-importing economies.

Attention now turns to Bank Indonesia's rate decision on Wednesday, where Citi expects policymakers to leave the benchmark rate unchanged at 5.75%. Investors will also be watching South Korea's second-quarter GDP and Singapore's inflation data later this week, as well as the European Central Bank's meeting on Thursday, for fresh clues on the outlook for global interest rates.