Dollar stabilizes, yen gains ahead of BOJ meeting
by Tom Westbrook
SINGAPORE (Reuters) – The dollar held steady on Thursday, after U.S. inflation and bond yields fell, while the yen posted a one-month high on rising Japanese rates.
The yen was the biggest mover against the dollar after softer-than-expected U.S. inflation data and led to sharp gains in Asia, as the prospect of a Federal Reserve rate cut next week was linked to murmurs of a Bank of Japan hike.
The yen traded as high as 155.21 against the dollar, its strongest since December 19. It has gained about 1.2% in the last two sessions.
BOJ Governor Kazuo Ueda and his deputy Ryozo Himino’s recent comments made it clear that a hike will be discussed at least at next week’s policy meeting and that markets have a 78% chance of a 25 basis point hike.
Bart Wakabayashi, manager of the State Street branch in Tokyo, said: “The fact that they’re talking about walking at this point is probably testing the waters ahead of the meeting.”
The euro was mostly steady after U.S. inflation data and was steady at $1.0283 on the Asian day, while the dollar eked out small gains elsewhere and the dollar index pared three-day losses to 109.18.
There was no immediate reaction in foreign exchange markets to the Gaza ceasefire, although the Israeli shekel rose to a one-month high on Wednesday.
Core US inflation was 0.2 percent month-on-month in December, in line with forecasts and below November’s 0.3 percent. It was below the annual, 3.2% reading of 3.3%. This is a softer-than-expected UK inflation reading and the Bank of England policymaker commented that it is the right time to cut interest rates.
Inflation eased traders, buying stocks and sending the benchmark 10-year Treasury down more than 13 basis points.
The currency’s reaction was a little more muted and it started to reverse on Thursday, in addition to gains from the yen, as traders remained cautious on strong US economic readings and possible tariffs with Donald Trump’s inauguration on January 20.
“Obviously, the dollar is bullish. But not everything is that big: Given the geopolitical backdrop, the dollar should build a risk premium,” Deutsche Bank macro strategist Tim Becker said in a note.
“Also, it is very common to see this kind of dollar strength when US growth outpaces its peers by this much – and in previous episodes the dollar has overestimated this relationship.”
