Dollar Dips as Inflation Cools, Yen Climbs on Expectations for BOJ Action

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The dollar edged lower on Thursday, retreating from recent highs as cooling U.S. inflation data led to a decline in bond yields, while the yen surged to a one-month high amid growing expectations for a rate hike by the Bank of Japan.

The yen was the biggest mover, rising approximately 1%, continuing its ascent in Asia. This came as U.S. inflation relief increased expectations for Federal Reserve rate cuts, coinciding with speculation about a potential rate hike from the Bank of Japan next week. The yen reached 155.21 per dollar, its strongest level since December 19. Meanwhile, the U.S. dollar lost some ground against the Australian and New Zealand dollars, with the Aussie hitting a one-week high of $0.6248 during the Asian trading session.

The euro was little changed, trading at $1.0298, while the dollar index slipped for the fourth consecutive session, easing slightly to 109.02.

Forex markets had a muted response to the announcement of a ceasefire agreement in Gaza, although the Israeli shekel did reach a one-month high. U.S. core inflation was up 0.2% month-on-month in December, in line with expectations and lower than November’s 0.3%. The annualized reading of 3.2% was also cooler than the anticipated 3.3%. This followed a similar softer-than-expected inflation reading from the UK and comments from a Bank of England policymaker advocating for rate cuts.

Traders, relieved by the inflation data, bought stocks, sending 10-year Treasury yields down by more than 13 basis points, although the response in currency markets was more subdued.

The dollar index is still up 0.5% for January, on track for a fourth consecutive monthly gain. Markets are now pricing in around 37 basis points of rate cuts by the Federal Reserve this year following the inflation data.

Deutsche Bank macro strategist Tim Baker noted that while the dollar had overshot rate spreads recently, this was not unusual, particularly when U.S. economic growth is outpacing that of other countries.

Markets are also eyeing potential disruptions from Donald Trump's inauguration day on Monday, with concerns over executive orders, particularly on tariffs, that could impact asset prices and the dollar.

The Chinese yuan, often seen as vulnerable to tariff risks, remained weak, trading near the lower end of its range at 7.3312. The New Zealand dollar was close to Monday's two-year low of $0.5543, and the Australian dollar hovered near a five-year low, with only a brief uptick from strong employment data on Thursday.

Sterling dipped slightly to $1.2233, and smaller currencies also showed little relief. Indonesia's rupiah hit a six-month low after a surprise rate cut by Bank Indonesia, while South Korea's won showed little movement despite the Bank of Korea's decision to keep its benchmark rate on hold at 3%.

Looking ahead, markets are focused on Chinese GDP figures set for release on Friday and the upcoming Bank of Japan meeting next week. Recent statements from BOJ Governor Kazuo Ueda and Deputy Governor Ryozo Himino have indicated that a rate hike will be discussed, with markets pricing in a 74% chance of a 25-basis-point increase to 0.5% in short-term rates.

 

 

 

 

 

 

 

 

Paraphrasing text from "Reuters" all rights reserved by the original author.