Written by Tom Westbrook
SINGAPORE (Reuters) – The dollar fell on Thursday, staying close to its recent highs as slow U.S. inflation data led to a decline in bond yields, while the yen hit its highest level in a month due to increasing bets on raising interest rates in Japan.
The yen was the biggest major mover for the dollar overnight, rising nearly 1% and extending gains in Asia, where easing U.S. inflation increased the chances of a Federal Reserve rate cut and coincided with murmurs of a Bank of Japan hike next week.
The yen was trading at 155.21 to the dollar, its highest level since December 19. The US currency also gave up some of its recent gains against the Australian and New Zealand dollars, hitting a one-week high of $0.6248 in the Asian morning.
The euro closed fairly stable, and was last bought at $1.0298. The index was trending lower for the fourth straight session on Thursday, falling slightly to 109.02.
Foreign exchange markets had little direct reaction to the announcement of the ceasefire agreement in Gaza, although the Israeli agreement touched its highest level in a month.
US core inflation was 0.2% m/m in December, in line with expectations and below 0.3% in November. On a yearly basis, the reading of 3.2% was cooler than expected at 3.3%. This came in the wake of a similar lower-than-expected inflation reading in Britain and statements from a policymaker at the Bank of England in which he said the time was right to cut interest rates.
Traders growing concerned about inflation responded with relief, buying stocks and sending benchmark 10-year Treasury yields down more than 13 basis points, although the currency market's reaction was somewhat more subdued.
The dollar index is still 0.5% stronger in January, and if it continues, it will post four consecutive monthly gains. Markets expected the Fed to ease an additional 10 basis points this year after the inflation data, with cuts of 37 basis points expected.
“Of course, the dollar has outpaced interest rate differentials recently,” he said. Deutsche Bank (ETR:) Macro strategist Tim Baker in a note.
“But it's not that big of a deal,” he said. “The dollar should increase its risk premium given the geopolitical backdrop.
He added: “Moreover, it is also completely normal to see the dollar strengthening like this when growth in the United States outperforms its peers to this extent – and in previous episodes the dollar exceeded this relationship.”
Markets are cautiously watching Donald Trump's inauguration on Monday for a slew of executive orders, particularly on tariffs, that will likely impact asset prices and the dollar.
“The strength of the dollar may partly reflect Trump 2.0 (tariff) concerns,” he said. Mizuho (NYSE:) Economist Vishnu Varathan.
which was seen on the front lines of tariff risks, barely managed to break out and was near the weak end of its trading range at 7.3312 in early trade. (CNY/)
The New Zealand dollar remains at $0.5623, close to Monday's two-year low of $0.5543, and the Australian dollar remains close to a recent five-year low, receiving only a brief boost from Thursday's strong employment numbers.
The pound fell slightly to $1.2233 in Asia, and there was little relief for smaller currencies.
The Indonesian rupiah hit a six-month low on Wednesday following a surprise interest rate cut from the Bank of Indonesia. The South Korean won did not get much support either from the central bank defying cut expectations to leave its benchmark interest rate unchanged at 3% on Thursday.
Along with the start of Trump's presidency, markets are looking forward to China's growth figures due on Friday and the Bank of Japan meeting next week.
Recent statements by Bank of Japan Governor Kazuo Ueda and his deputy Ryozo Himeno have made it clear that a rate hike will at least be discussed, and markets have set a 74% chance of a 25 basis point hike in short-term interest rates to 0.5%.
