Forex
Dollar rises vs yen as BOJ sticks with ultra-loose policy
© Reuters. FILE PHOTO: Japanese Yen and U.S. dollar banknotes are seen in this illustration taken March 10, 2023. REUTERS/Dado Ruvic/Illustration/File Photo/File Photo
By Saqib Iqbal Ahmed
NEW YORK (Reuters) -The U.S. dollar rose against the yen on Tuesday after the Bank of Japan gave no sign that its ultra-loose monetary policy was set to end, but expectations for interest rate cuts next year continued to weigh against the greenback more broadly.
The Bank of Japan maintained its ultra-loose policy settings as expected, as it opted to await more evidence on whether wages and prices would rise enough to justify a shift away from massive monetary stimulus.
The central bank also made no change to its dovish policy guidance, dashing hopes among some traders it would tweak the language to signal a near-term end to negative interest rates.
“Traders are pulling back on a move into positive rate territory from the Bank of Japan into early new year,” said Karl Schamotta, chief market strategist at Corpay in Toronto.
“There was no hint in the press conference or in the statement that policymakers are ready to move rates up dramatically,” Schamotta said.
The dollar was 0.79% higher against the yen at 143.925 yen. Through Monday, the dollar had retreated about 3.7% against the yen this month, hurt by broad dollar weakness and also as traders stepped up yen-buying on speculation of a BOJ policy shift.
Meanwhile the dollar continued to struggle against most majors as traders sold the U.S. currency on expectations that the Federal Reserve is about to start cutting rates as early as March.
While Fed officials have pushed back against market expectations of how soon the Federal Open Market Committee (FOMC) could cut rates, those comments have done little to sway market pricing and stem the greenback’s decline.
“We’re going to maybe see a little bit of a rocky start to the year where people are going to try to sell dollars just on Fed expectations and as the Bank of England and ECB remain somewhat in the higher-for-longer camp, and EM assets continue to rally,” Brad Bechtel, global head of FX at Jefferies in New York.
But the relative strength of the U.S. economy should insulate the dollar from further pronounced weakness, he said.
“In the U.S., maybe we slow a bit, but we don’t go into recession. That’s actually still pretty dollar positive,” Bechtel said.
The , which measures the currency’s strength against a basket of six rivals, was 0.30% lower at 102.18. The index has dipped 1.5% over the last week.
Chicago Fed President Austan Goolsbee on Monday said the Fed was not pre-committing to cutting rates soon or swiftly, and the jump in market expectations that it will do so was at odds with how the U.S. central bank functions.
A reading on the core Personal Consumption Expenditures (PCE) price index – the Fed’s preferred measure of underlying inflation – is due this week, and may provide clarity on whether inflation has slowed enough for the Fed to begin easing policy next year.
The risk-sensitive Australian and New Zealand dollars sat around their highest in nearly five months, further beneficiaries of the softening dollar.
The was 0.78% higher at $0.6757, its highest since late July. Minutes from the Reserve Bank of Australia’s December policy meeting showed on Tuesday that the bank considered hiking rates, but decided there were enough encouraging signs on inflation to pause for more data.The rose 0.85% to 0.62645.
The Canadian dollar strengthened to a four-and-a-half-month high against its U.S. counterpart as investors reduced bets on an early start to Bank of Canada interest rate cuts after domestic data showed inflation holding steady in November.
The pound rose 0.56%, helped by the dollar’s broad weakness and as investors increasingly talked up sterling as a hot prospect for next year.
In cryptocurrencies, was about flat on the day at $42,365.
Investing.com – The US dollar rose in thin holiday-impacted trade Tuesday, retaining recent strength as traders prepared for fewer Federal Reserve rate cuts in 2025.
At 04:25 ET (09:25 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% higher to 107.905, near the recently hit two-year high.
Dollar remains in demand
The dollar has been in demand since the Federal Reserve outlined a hawkish outlook for its interest rates after its last policy meeting of the year last week, projecting just two 25 bp rate cuts in 2025.
In fact, markets are now pricing in just about 35 basis points of easing for 2025, which has in turn sent US Treasury yields surging, boosting the dollar.
The two-year Treasury yield last stood at 4.34%, while the benchmark 10-year yield steadied near a seven-month high at 4.59%.
“We think this hawkish re-tuning of the Fed’s communication will lay the foundation for sustained dollar strengthening into the new year,” said analysts at ING,in a note.
Trading volumes are likely to thin out as the year-end approaches, with this trading week shortened by the festive period.
Euro near to two-year low
In Europe, fell 0.1% to 1.0396, near a two-year low, with the set to cut interest rates more rapidly than its US rival as the eurozone struggles to record any growth.
The ECB lowered its key rate earlier this month for the fourth time this year, and President Christine Lagarde said earlier this week that the eurozone was getting “very close” to reaching the central bank’s medium-term inflation goal.
“If the incoming data continue to confirm our baseline, the direction of travel is clear and we expect to lower interest rates further,” Lagarde said in a speech in Vilnius.
Inflation in the eurozone was 2.3% last month and the ECB expects it to settle at its 2% target next year.
traded largely flat at 1.2531, with sterling showing signs of weakness after data showed that Britain’s economy failed to grow in the third quarter, and with Bank of England policymakers voting 6-3 to keep interest rates on hold last week, a more dovish split than expected.
Bank of Japan stance in focus
In Asia, fell 0.1% to 157.03, after rising as high as 158 yen in recent sessions, after the signaled that it will take its time to consider more interest rate hikes.
edged 0.1% higher to 7.3021, remaining close to a one-year high as the prospect of more fiscal spending and looser monetary conditions in the coming year weighed on the currency.
Beijing signaled that it will ramp up fiscal spending in 2025 to support slowing economic growth.
Investing.com– Most Asian currencies moved in a tight range on Tuesday, while the dollar extended overnight gains as traders positioned for a slower pace of interest rate cuts in the coming year.
Trading volumes were muted before the Christmas break, while most regional currencies were nursing steep losses against the greenback for the year.
Asian currencies weakened sharply last week after the Federal Reserve effectively halved its outlook for rate cuts in 2025, citing concerns over sticky U.S. inflation.
Dollar near 2-year high on hawkish rate outlook
The and both rose about 0.1% in Asian trade, extending overnight gains and coming back in sight of a two-year high hit last week.
While the greenback did see some weakness after data read lower than expected for November, this was largely offset by traders dialing back expectations for interest rate cuts in 2025.
The Fed signaled only two rate cuts in the coming year, less than prior forecasts of four.
Higher U.S. rates diminish the appeal of risk-driven Asian markets, limiting the amount of capital flowing into the region and pressuring regional markets.
Asia FX pressured by sticky US rate outlook
Most Asian currencies weakened in recent sessions on the prospect of slower rate cuts in the U.S., while uncertainty over local monetary policy and slowing economic growth also weighed.
The Japanese yen’s pair fell 0.1% on Tuesday after rising as high as 158 yen in recent sessions, after the Bank of Japan signaled that it will take its time to consider more interest rate hikes.
The Australian dollar’s pair fell 0.2% after the minutes of the Reserve Bank’s December meeting showed policymakers saw an eventual easing in monetary policy, citing some progress in bringing down inflation. But they still flagged potential upside risks for inflation.
The Chinese yuan’s pair rose 0.1% and remained close to a one-year high, as the prospect of more fiscal spending and looser monetary conditions in the coming year weighed on the currency.
Beijing signaled that it will ramp up fiscal spending in 2025 to support slowing economic growth.
The Singapore dollar’s pair rose 0.1%, while the Indian rupee’s pair rose 0.1% after hitting record highs above 85 rupees.
Investing.com — The dollar has surged past its post-2022 range, buoyed by U.S. economic exceptionalism, a widening interest rate gap, and elevated tariffs, setting the stage for further gains next year.
“Our base case is that the dollar will make some further headway next year as the US continues to outperform, the interest rate gap between the US and other G10 economies widens a little further, and the Trump administration brings in higher US tariffs,” Capital Economics said in a recent note.
The bullish outlook on the greenback comes in the wake of the dollar breaking above its post-2022 trading range, reflecting renewed confidence among investors driven by robust U.S. economic data and policy expectations.
A key risk to the upside call on the dollar is a potential economic rebound in the rest of the world, similar to what occurred in 2016, Capital Economics noted.
Following the 2016 U.S. election, economic activity in the rest of the world rebounded, while Trump’s tax cuts didn’t materialize until the end of 2017, and the Fed took a more dovish path than discounted, resulting in a 10% drop in the DXY on the year, which was its “worst calendar year performance in the past two decades,” it added.
While expectations for a recovery in Europe and Asia seem far off, a positive surprise for global growth “should be ruled out”, Capital Economics said.
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