By Tom Westbrook
SINGAPORE (Reuters) – The dollar steadied on Thursday, after plunging alongside slowing U.S. inflation and falling bond yields, while the yen hit a one-month high on the rise bets on a rate hike in Japan.
The yen was the biggest mover against the dollar after weaker-than-expected US inflation data and extended gains in Asia as increased chances of a Federal Reserve rate cut coincided with rumors of an increase from the Bank of Japan next week.
The yen traded at 155.21 per dollar, its highest level since December 19. It has gained around 1.2% over the past two sessions.
Recent remarks by BOJ Governor Kazuo Ueda and his deputy Ryozo Himino made it clear that a hike would at least be discussed at next week’s policy meeting and that markets are pricing in a probability of around 78% of a 25 basis point increase.
“The fact that they are talking about hiking at this time, right before the meeting, could test the waters,” said Bart Wakabayashi, director of the State Street branch in Tokyo.
The euro remained broadly stable after the release of US inflation data and held steady throughout the Asian day at $1.0283, while the dollar made slight gains elsewhere and the dollar ended three days of losses to edge up to 109.18.
There was little direct reaction in foreign exchange markets to the Gaza ceasefire agreement, although the Israeli shekel touched its highest level in a month on Wednesday.
Core inflation in the United States stood at 0.2% month-on-month in December, in line with forecasts and lower than November’s 0.3%. On an annualized basis, the 3.2% figure was lower than expectations of 3.3%. It followed a similarly weaker-than-expected UK inflation rate and remarks from a Bank of England policymaker saying now was the time to cut interest rates.
Traders who had grown increasingly worried about inflation reacted with relief, buying stocks and sending benchmark 10-year Treasury yields lower by more than 13 basis points.
The currency reaction was a little more muted and, apart from the yen’s gains, had started to ease on Thursday as traders kept a cautious eye on still-strong US economic figures and possible tariffs as well. as on the inauguration of Donald Trump on January 20 as president.
“Of course, the dollar has outperformed credit spreads lately,” Deutsche Bank macro strategist Tim Baker said in a note. “But it’s not that important. The dollar should generate a risk premium given the geopolitical context.
“It is also entirely normal to see such strength in the dollar when US growth is outperforming its peers to this extent – and in previous episodes the dollar has outperformed this relationship.”
