By Tom Westbrook
SINGAPORE (Reuters) – The dollar slipped on Thursday to stand just off recent peaks as cooling U.S. inflation data knocked down bond yields, while the yen hit a one-month high on rising bets on a rate hike in Japan.
The yen was the biggest major mover on the dollar overnight, rising about 1% and extending gains in Asia, as inflation relief in the U.S. raised chances of Federal Reserve rate cuts and coincided with murmurs of a Bank of Japan hike next week.
The yen traded as firm as 155.21 per dollar, its strongest since Dec. 19. The greenback also handed back some recent gains against the Australian and New Zealand dollars and the Aussie hit a one-week high of $0.6248 in the Asia morning.
The euro ended up fairly steady and was last buying $1.0298. The dollar index was heading lower for a fourth straight session on Thursday, easing slightly to 109.02.
Foreign exchange markets made little direct reaction to the announcement of a ceasefire deal in Gaza, though the Israeli shekel did touch a one-month high.
Core U.S. inflation was 0.2% month-on-month in December, in line with forecasts and below November’s 0.3%. Annualised, the 3.2% reading was cooler than the expectation for 3.3%. That followed a similarly softer-than-expected British inflation reading and remarks from a Bank of England policymaker saying the time was right to bring down interest rates.
Traders who have been growing worried about inflation responded with relief, buying stocks and sending benchmark 10-year Treasury yields down more than 13 basis points, although the currency market reaction was a bit more muted.
The dollar index remains 0.5% firmer in January and, if sustained, would notch four consecutive monthly gains. Markets priced in about an extra 10 bps of Federal Reserve easing this year after the inflation data, reckoning on 37 bps of cuts.
“Of course, the dollar has overshot rate spreads lately,” said Deutsche Bank (ETR:DBKGn) macro strategist Tim Baker in a note.
“But it’s not all that large,” he said. “The dollar should build in risk premium given the geopolitical backdrop.
“Further,” he said, “it’s also completely normal to see dollar strength like this when U.S. growth is outperforming peers to this extent – and in previous episodes the dollar has overshot this relationship.”
Markets have a wary eye on Donald Trump’s inauguration day on Monday for a slew of executive orders, especially on tariffs, that are likely to roil asset prices and the dollar.
“USD strength may partly reflect Trump 2.0 (tariff) fears,” said Mizuho (NYSE:MFG) economist Vishnu Varathan.
China’s yuan, seen on the front lines of tariff risk, hardly caught a break and was near the weak end of its trading band at 7.3312 in early trade. [CNY/]
The New Zealand dollar, at $0.5623, is still near Monday’s two-year low of $0.5543 and the Aussie remains within reach of a recent five-year low, receiving only a brief boost from robust employment figures on Thursday.
Sterling dipped slightly to $1.2233 in Asia and there was not all that much relief for smaller currencies.
Indonesia’s rupiah had made a six-month trough on Wednesday following a surprise rate cut from Bank Indonesia. South Korea’s won did not take much of a boost, either, from the central bank defying expectations for a cut to leave its benchmark rate on hold at 3% on Thursday.
Besides the beginning of Trump’s presidency, markets are looking ahead to Chinese growth figures due on Friday and to a Bank of Japan meeting next week.
Recent remarks from BOJ Governor Kazuo Ueda and his deputy Ryozo Himino have made clear that a hike will at least be discussed and markets have priced about a 74% chance of a 25 basis point rise in short-term rates to 0.5%.