Forex
Dollar retreats ahead of inflation data; Yen soars on Ueda’s comments
© Reuters.
Investing.com – The U.S. dollar fell in early European trade Monday, retreating from a six-month high, while the Japanese yen surged as comments from Bank of Japan Governor Kazuo Ueda signaled a potential change in monetary policy.
At 03:20 ET (07:20 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.5% lower to 104.212, falling from last week’s six-month high of 105.15.
Yen soars after Ueda hints at policy change
Dragging the lower Monday has been sharp gains in the yen, with 1.2% lower at 146.06, as BOJ head Kazuo Ueda flagged a potential pivot away from negative interest rates.
This extremely easy monetary policy has contributed significantly to the yen falling to 10-month lows against the dollar given the growing interest rate differentials.
Ueda told a local newspaper that the BOJ could have enough data by the end of the year to determine whether rates should stay negative, adding that the bank’s 2% inflation target was just in sight, allowing policymakers to begin considering tightening policy.
ECB policy meeting looms large
Elsewhere, rose 0.2% to 1.0724, climbing from last week’s three-month low as traders prepare for Thursday’s policy-setting meeting from the .
There is a great deal of uncertainty over the ECB’s rate decision as price pressures remain elevated while data shows economic activity is now slowing sharply.
The central bank has raised rates at each of its past nine meetings and policymakers are now debating whether to raise the deposit rate again, to 4%, or pause.
rose 0.4% to 1.2518, also rebounding from a three-month low hit last week, with traders keenly awaiting Tuesday’s release of July , which could see a reduction of wage inflationary pressures.
Traders eagerly await U.S. inflation data
Despite Monday’s losses, the dollar still remains near its highest levels in six months, helped by a recent run of resilient economic data which lifted expectations that further rate hikes from the Federal Reserve may be on the horizon.
U.S. data, due on Wednesday, as well as on Thursday, will be carefully studied for more cues on monetary policy and the path of interest rates.
The is widely expected to keep interest rates on hold at its meeting next week, but data showing inflation remains sticky could point to another hike later in the year.
“With activity data staying strong, it seems the market may be more minded to buy into the idea of another ‘skip’ – i.e. the Fed not hiking in September but hiking again later in the year. Clearly, this pushes the idea of a Fed easing cycle later and keeps the dollar stronger for longer,” said analysts at ING, in a note.
Chinese yuan bounces off 16-year low
fell 0.7% to 7.2920, with the yuan bouncing from Friday’s 16-year low after China’s central bank signaled increasing discomfort with the currency’s recent weakness with a strong daily midpoint guidance rate.
Positive inflation data from China over the weekend also helped as it showed some improvement in Asia’s largest economy.
Investing.com – The US dollar has gained strongly since the US presidential election in November, but these gains are unlikely to limit the hit that US customers are likely to face from tariffs, according to UBS.
At 08:25 ET (13:25 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.2% lower to 108.950, but was around 1.5% higher over the last month, and remained not far from the more than two-year high seen last week.
The theory is that a stronger dollar lowers US import prices, said analysts at UBS, in a note dated Jan. 17. Those lower prices would partially offset the tax payments US consumers must make to the US Treasury when buying imports.
If the US paid for the Chinese imports, then a stronger dollar would automatically reduce the amount of dollars paid (fewer dollars are exchanged to pay the renminbi price). However, the US pays for practically all its imports in dollars, so this does not happen.
If the dollar strengthens, the dollar price is unchanged, unless the exporter consciously chooses to lower the dollar price of the goods sold, UBS added.
An exporter to the US might deliberately lower dollar prices, as (in dollar terms) local currency costs are lower. But local currency costs are only a fraction of a manufacturer’s costs.
“A Chinese electronics manufacturer, importing chips (bought in dollars) and exporting computers to the US (in dollars), will probably keep their dollar prices stable—ignoring currency moves,” UBS added.
The US dollar strengthened against China’s renminbi in 2016 and 2018/19, and US import price inflation for products from China showed no noticeable break with earlier trends.
The preference seems to have been to reroute supply chains as a way of avoiding trade taxes.
Investing.com – The US dollar slumped Monday following a report that indicated that President-elect Donald Trump was set to delay imposing trade tariffs immediately upon his inauguration, an expectation which had boosted the US currency following his November election victory.
At 09:20 ET (14:20 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 1.1% lower to 108.020, having climbed to a more than two-year high last week.
The Wall Street Journal reported Monday that Trump is planning to issue a broad memorandum on his inauguration that directs federal agencies to study trade policies and evaluate US trade relationships with China and America’s continental neighbors—but stops short of imposing new tariffs on his first day in office.
The memo, which the WSJ has seen, suggests that debates are still ongoing within the incoming administration over how to deliver on Trump’s campaign trail promises for hefty tariffs on imports from trade rivals such as China.
The dollar has gained around 4% since the November presidential election as traders anticipated Trump’s policies will be inflationary, necessitating higher interest rates for a longer period.
“Financial markets are on tenterhooks to see what executive orders newly elected US President Donald Trump will enact on his first day,” said analysts at ING, in a note.
“FX markets are most interested in what he has to say about tariffs and what kind of pain the Oval Office plans to inflict on major trade partners.”
Bank of America (BofA) noted a significant increase in repo rates during the week of January 13 due to heightened liquidity demand triggered by tax payments and limited funding provided by the People’s Bank of China (PBoC).
The liquidity squeeze was most noticeable on January 16, the day following the tax payment deadline, with DR007 and R007 reaching 2.34% and 4.19%, respectively.
The PBoC maintained its stance on defending the exchange rate stability, resulting in the tightness of (RMB) liquidity being felt in the offshore market as well.
On January 9, the central bank announced it would issue RMB60 billion of 6-month bills in Hong Kong, a significant increase compared to previous issuances. The coupon rate of 3.4% was notably higher than the December issuance, reflecting the tightness of CNH liquidity and subdued demand from investors.
The December FX settlement balance by banks’ clients fell further to a deficit of US$10.5 billion, the first deficit reading since July 2024. A key change from the previous month was a sharp increase in USD demand for service trade. Reports also suggest that domestic importers have been actively purchasing USD via FX forward to hedge against tariffs risk in recent weeks, which has been exerting upward pressure on forward points.
On January 13, the PBoC increased the cross-border macroprudential parameter to 1.75 from 1.50. This move allows domestic corporations and Financial Institutions (FIs) to conduct more cross-border borrowing.
Given the widened interest rate gap between China and overseas, BofA believes this is more of a symbolic move by the PBoC to anchor market’s expectation on FX.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.
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