The U.S. dollar slipped on Thursday, just off recent peaks, after cooling U.S. inflation data pushed bond yields lower, while the Japanese yen surged on rising expectations of a Bank of Japan (BOJ) rate hike next week. The yen was the biggest mover, climbing around 1% and extending its gains in Asia, reaching its strongest level since December 19, trading as firm as 155.21 per dollar.
The easing U.S. inflation data, with core inflation rising 0.2% in December (below the 0.3% rise in November), reduced concerns over persistent inflation, leading to speculation that the Federal Reserve might ease interest rates further. This contributed to a decline in U.S. Treasury yields, with the 10-year yield dropping more than 13 basis points. As a result, the dollar handed back some of its recent gains, particularly against the Australian and New Zealand dollars. The Aussie reached a one-week high of $0.6248 in early Asia trading.
The euro remained relatively stable, trading at $1.0298, while the dollar index, which tracks the greenback against a basket of currencies, eased to 109.02, marking a fourth consecutive session of declines. Despite the announcement of a ceasefire deal in Gaza, the currency market showed little direct reaction, though the Israeli shekel did hit a one-month high.
Market Response to Inflation and Geopolitical Risks Core U.S. inflation, at 3.2% year-on-year, was lower than expectations (3.3%), reinforcing market sentiment that the Fed may hold off on further rate hikes. Similarly, British inflation also came in softer than expected, and a Bank of England policymaker suggested the time had come to cut rates. These inflation relief signals sent traders back into stocks, with bond yields falling in tandem.
However, despite these developments, the dollar remains up 0.5% in January and is on track for a fourth consecutive monthly gain. Markets have priced in about 37 basis points of Federal Reserve easing in 2025, contributing to the dollar’s relative strength. Deutsche Bank’s Tim Baker notes that while the dollar has outperformed in recent months due to U.S. growth, it’s expected to face some risk premium, especially given the geopolitical backdrop, including concerns about tariffs under former President Donald Trump’s second term.
Focus on Japan and China In Asia, the yen continued to strengthen amid speculation that the Bank of Japan might raise short-term rates by 25 basis points to 0.5% next week, with markets assigning a 74% probability to such a move. BOJ Governor Kazuo Ueda’s recent comments, coupled with his deputy’s remarks, have raised expectations of a policy shift. Meanwhile, China’s yuan was near the weak end of its trading band at 7.3312, reflecting ongoing trade and tariff risks, especially as Trump’s re-election could lead to new executive orders impacting tariffs.
Other currencies like the New Zealand dollar and Australian dollar remained under pressure, with the Kiwi near a two-year low and the Aussie still near a recent five-year low despite some positive data. Sterling also showed slight weakness, dipping to $1.2233.
Outlook The currency market’s focus is now on the upcoming U.S. presidential inauguration, which could bring executive orders on tariffs that might impact the dollar and other assets. Investors are also awaiting Chinese growth figures on Friday and the outcome of the Bank of Japan’s meeting next week.
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