The dollar retreated on Thursday to just off recent highs as slowing U.S. inflation data pushed bond yields lower, while the yen hit its highest level in a month, due to growing bets on a rate hike in Japan.
The yen was the biggest mover on the dollar last night, rising about 1% and extending gains in Asia, as easing inflation in the United States increased the chances of a rate cut in the Federal Reserve and coincided with murmurs of a Bank of Japan hike next week.
The yen traded as high as 155.21 per dollar, its highest level since December 19. The greenback also lost some recent gains against the Australian and New Zealand dollars and the Australian dollar hit a one-week high of $0.6248 in morning trading in Asia.
The euro remained relatively stable and stood at $1.0298. The Dollar Index was down for a fourth consecutive session on Thursday, falling slightly to 109.02.
Foreign exchange markets reacted little to news of a ceasefire agreement in Gaza, although the Israeli shekel rose to its highest level in a month.
US core inflation was 0.2% month-on-month in December, in line with forecasts and lower than in November (0.3%). On an annual basis, the figure of 3.2% was lower than expectations of 3.3%. The development followed weaker-than-expected British inflation and remarks from a Bank of England official who said the time had come to cut interest rates.
Traders who were increasingly worried about inflation reacted with relief, buying stocks and pushing 10-year Treasury yields down more than 13 basis points, although the foreign exchange market’s reaction was a little more discreet.
The Dollar Index remains up 0.5% in January and, if sustained, would record four consecutive monthly gains. Markets have priced in about 10 basis points more of Federal Reserve easing this year after the inflation data, pricing in 37 basis points of cuts.
“Of course, the dollar has outperformed credit spreads lately,” Deutsche Bank macro strategist Tim Baker said in a note.
“But it’s not that important,” he added. “The dollar should incorporate a risk premium given the geopolitical context.
“Furthermore, it is entirely normal to see such strong dollar strength when US growth outperforms its peers to this extent – and in previous episodes the dollar has outperformed this relationship.
Markets have a wary eye on Donald Trump’s inauguration day on Monday for a series of executive orders, particularly on tariffs, that are likely to dent asset prices and the dollar.
“The dollar’s strength could partly reflect fears of Trump 2.0 (tariffs),” said Vishnu Varathan, an economist at Mizuho.
The Chinese yuan, considered at the forefront of tariff risk, saw no respite and was near the weak end of its trading range at 7.3312 in early trade. [CNY/]
The New Zealand dollar, at $0.5623, is still near its two-year low of $0.5543 and the Australian dollar remains within reach of a five-year low, receiving just a brief boost from employment figures on Thursday.
The British pound fell slightly to $1.2233 in Asia and smaller currencies were not really spared.
The Indonesian rupiah hit a six-month low on Wednesday, following a surprise interest rate cut from Bank Indonesia. The South Korean won also didn’t get much of a boost as the central bank defied expectations of a cut to keep its benchmark rate at 3% on Thursday.
In addition to the start of the Trump presidency, markets are impatiently awaiting Chinese growth figures, expected on Friday, and the Bank of Japan meeting next week.
Recent remarks by BOJ Governor Kazuo Ueda and his deputy Ryozo Himino made it clear that a hike would at least be discussed and markets have put the chance of a 25 basis point increase at 74%. short-term rates at 0.5%.
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