Forex
Dollar wobbles in thin trading; yen firms
© Reuters. FILE PHOTO: U.S. Dollar banknotes are seen in this illustration taken July 17, 2022. REUTERS/Dado Ruvic/Illustration/File Photo
By Rae Wee
SINGAPORE (Reuters) -The dollar was trying to find a floor on Tuesday in holiday-thinned trade, pressured by signs that inflation in the world’s largest economy is cooling which will likely give the Federal Reserve room to ease interest rates next year.
The yen meanwhile steadied near its recent five-month peak on the view that the Bank of Japan (BOJ) could soon mark an end to its ultra-easy policy. For most of 2022 and 2023, the policy has kept the Japanese currency under pressure as other major central banks embarked on aggressive rate-hike cycles.
Currency moves were largely muted in the day after Christmas, as markets in the UK, Australia, New Zealand and Hong Kong, among others, were still out for a public holiday.
Against the greenback, the New Zealand dollar scaled a fresh five-month peak of $0.6325, while the Australian dollar was similarly huddled near its recent five-month top and last bought $0.6817.
The euro edged 0.03% higher to $1.1024, not too far from a five-month top of $1.1040 hit last week, while sterling was little changed at $1.2706.
Data released on Friday showed U.S. prices fell in November from the previous month for the first time in more than 3-1/2 years and the annual increase in inflation slipped further below 3%, boosting market expectations of an interest rate cut from the Fed next March.
The reading came a week after Fed policymakers opened the door to rate cuts in 2024 at the central bank’s final policy meeting for the year, a move that drove the dollar lower.
“The Fed has made considerable progress on inflation, as core started the year closer to an annual rate of 5%, though the job is not yet done in ensuring inflation is on a sustained trajectory toward its 2% target,” Wells Fargo analysts said in a note.
The languished near a five-month low of 101.42 hit last week, and was last at 101.59.
In Asia, the yen rose 0.1% to 142.25 per dollar, drawing additional support from comments by BOJ Governor Kazuo Ueda.
Ueda said on Monday the likelihood of achieving the central bank’s inflation target was “gradually rising” and it would consider changing policy if prospects of sustainably achieving the 2% target increase “sufficiently”, though he said the BOJ had not decided on a specific timing to change its ultra-loose monetary stance.
“BOJ Governor Ueda did not provide any policy guidance in his speech yesterday, though he was hopeful that Japan was finally getting out of the low-inflation environment,” said Alvin Tan, head of Asia FX strategy at RBC Capital Markets.
A slew of data out on Tuesday showed Japan’s jobless rate was unchanged at 2.5% in November from the previous month, while business-to-business service inflation was steady at 2.3% last month.
Elsewhere, the Chinese yuan dipped against the greenback on rising expectations of further monetary easing measures from Beijing.
Five of China’s largest state banks lowered interest rates on some deposits at the end of last week, the third round of such cuts this year. Several listed banks have since followed suit, the official Shanghai Securities News reported on Tuesday.
The cuts could smoothen the People’s Bank of China’s (PBOC) move towards easing monetary policy, and will drive money into wealth management products and bond funds, Caitong Securities said in a report.
The edged 0.1% lower to 7.1433 per dollar, while its offshore counterpart last stood at 7.1461 per dollar.
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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