Currency Markets React to Cooling US Inflation
The US dollar stabilized on Thursday, following a dip in response to softer-than-expected US inflation data and declining bond yields. Meanwhile, the Japanese yen surged to a one-month high, driven by growing speculation about a potential rate hike by the Bank of Japan.
Yen Soars on Rate Hike Speculation
The yen was the biggest mover against the dollar, extending its gains in Asian markets as the probability of a Federal Reserve rate cut increased. The currency traded as high as 155.21 per dollar, its strongest level since December 19. It has gained around 1.2% over the past two sessions. Recent comments from Bank of Japan Governor Kazuo Ueda and his deputy Ryozo Himino have fueled expectations of a rate hike at next week’s policy meeting, with markets pricing in a 78% chance of a 25 basis point increase.
Euro Steadies, Dollar Index Rises
The euro held steady after the US inflation data, trading at $1.0283 throughout the Asian day. The dollar index, which had fallen for three consecutive days, rose slightly to 109.18. Meanwhile, the Israeli shekel touched a one-month high on Wednesday, following a ceasefire deal in Gaza.
US Inflation Data Sparks Relief
Core US inflation came in at 0.2% month-on-month in December, in line with forecasts and below November’s 0.3%. The annualized reading of 3.2% was also below expectations. This followed a similarly soft British inflation reading and remarks from a Bank of England policymaker suggesting it was time to cut interest rates. Traders responded with relief, buying stocks and sending benchmark 10-year Treasury yields down more than 13 basis points.
Currency Reaction Muted
While the yen’s gains were significant, the currency reaction was otherwise muted. Traders remained cautious, keeping an eye on still-strong US economic readings and potential tariffs ahead of Donald Trump’s inauguration as president. According to Deutsche Bank macro strategist Tim Baker, “the dollar has overshot rate spreads lately, but it’s not all that large. The dollar should build in risk premium given the geopolitical backdrop.”
Asian Currencies Struggle
China’s yuan remained pinned near the weak end of its trading band, while the New Zealand dollar hovered near a two-year low. The Australian dollar received a brief boost from robust jobs numbers but slid back below $0.62 as the day wore on. Sterling dipped 0.3% to $1.2212, and smaller currencies such as Indonesia’s rupiah and South Korea’s won also struggled.
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