By Tom Westbrook
SINGAPORE (Reuters) – The dollar slipped on Thursday to hold just above recent highs as chilling U.S. inflation data pushed down bond yields, while the yen hit a one-month high on rising bets on a rate hike in Japan.
The yen was the dollar’s biggest mover overnight, rising about 1% and extending gains in Asia, as falling US inflation boosted the chances of a Federal Reserve rate cut and coincided with rumblings of a Bank of Japan hike next week.
The yen traded firmly at 155.21 to the dollar, its strongest since December 19. The greenback also gave back some recent gains against the Australian and New Zealand dollars and hit a one-week high of $0.6248 in Asian morning.
The Euro ended up being quite stable and was last buying at $1.0298. The index moved lower for a fourth straight session on Thursday, easing slightly to 109.02.
Foreign exchange markets reacted little directly to the Gaza ceasefire announcement, although Israeli markets touched a one-month high.
Core inflation in the US was 0.2% on a monthly basis in December, in line with forecasts and below November’s 0.3%. On an annual basis, the reading of 3.2% was lower than expectations of 3.3%. That followed a similarly softer-than-expected reading of UK inflation and remarks from a Bank of England policymaker who said the time was right to cut interest rates.
Traders increasingly worried about inflation reacted with relief, buying stocks and sending the benchmark 10-year yield down more than 13 basis points, although the currency market’s reaction was a little more muted.
The dollar index remains 0.5% stronger in January and, if held, would make it four straight monthly gains. Markets had priced in about an additional 10 basis points of Federal Reserve easing this year after the inflation data, counting on a 37 basis point cut.
“Of course, the dollar has recently exceeded exchange rate differences,” he said Deutsche Bank (ETR:) macro strategist Tim Baker in a note.
“But it’s not all that big,” he said. “The dollar should increase the risk premium given the geopolitical backdrop.
“Furthermore,” he said, “it’s also completely normal to see this kind of dollar strength when US growth is so outpacing its peers — and in previous episodes the dollar has exceeded this ratio.”
Markets are cautiously watching Donald Trump’s inauguration day on Monday because of a series of executive orders, particularly on tariffs, that are likely to shake asset prices and the dollar.
“USD strength could partly reflect fears of Trump 2.0 (tariffs),” he said Mizuho (NYSE: ) economist Vishnu Varathan.
seen on the front lines of tariff risk, it barely caught a break and was near the weak edge of its trading range 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 Australian dollar remains within reach of a recent five-year low, having received only a brief boost from Thursday’s strong employment figures .
Sterling fell slightly to $1.2233 in Asia and there was not as much relief for smaller currencies.
The Indonesian rupiah hit a six-month low on Wednesday after a surprise rate cut by Bank Indonesia. South Korea’s won didn’t get much of a boost either, as the central bank defied expectations to cut its benchmark rate to 3% on Thursday.
Apart from the start of Trump’s presidency, markets are looking forward to Chinese growth data on Friday and the Bank of Japan’s meeting next week.
Recent statements by BOJ Governor Kazu Ueda and his deputy Ryozo Himino made it clear that a hike would at least be discussed, with markets pricing in around a 74% chance of a 25 basis point rise in short-term interest rates to 0.5%.
