Forex
Dollar rises vs yen on BOJ caution while euro sell-off pauses
By Wayne Cole and Harry Robertson
SYDNEY/LONDON (Reuters) -The dollar climbed against the yen on Monday after Japan’s top central banker flagged further monetary policy tightening ahead but left open the question of timing, while the euro steadied after falling to a one-year low late last week.
Bank of Japan Governor Kazuo Ueda reiterated that interest rates would continue to rise gradually should the economy develop in line with the central bank’s outlook, in his first opportunity to speak directly on monetary policy since Donald Trump’s victory in the U.S. presidential election on Nov. 5.
However, he made no mention of whether a hike would come in December, saying the BOJ would need to pay attention to various risks, including for the U.S. economy.
The lack of clear guidance saw the dollar rise 0.62% to 155.12 yen and away from Friday’s low of 153.86. It pulled back late last week after Japanese Finance Minister Katsunobu Kato on Friday put the market on warning of possible intervention if the yen fell too far and too fast.
“Market participants were watching closely to see if he would give any clear signal that the BoJ are planning on raising rates one more time this year,” said Lee Hardman, currency analyst at MUFG. “However, Governor Ueda refrained from providing any clear signal.”
The market was pricing a roughly 54% chance of a quarter-point hike at the next policy meeting on Dec. 19, little changed from before the speech.
Against a basket of currencies the dollar held at 106.77, having touched a one-year top of 107.07 on Friday. The index climbed 1.6% last week, marking six weeks of gains in the last seven.
The rally has coincided with a 70-basis-point surge in 10-year Treasury yields since the start of October, fuelling a 5.4% rise in the as U.S. bonds have become more attractive.
EURO STEADIES, EYES ON TARIFFS
The euro was last flat at $1.0537 , although it remained uncomfortably close to Thursday’s one-year trough of $1.0496.
Trump’s election victory has caused the euro to slump as investors have priced in the potential for tariffs on the European Union and China, a key European trading partner. Investors and analysts have begun to talk of a possible fall to parity, where one euro equals a dollar.
“If we’re looking next year, I think it’s fair to think we could be trading close to parity or at parity, it really depends on the implementation of the protectionist agenda by Trump,” said Francesco Pesole, currency strategist at ING.
Markets are eager to hear who Trump will pick as Treasury Secretary, with numerous media reports saying the president-elect has extended the list of potential candidates to include former Federal Reserve governor, Kevin Warsh, and billionaire executive Marc Rowan.
Analysts generally assume Trump’s touted policies of tariffs, reduced immigration and debt-funded tax cuts will be inflationary, limiting the scope for further rate cuts by the Federal Reserve.
Sterling has also suffered under the dollar’s recent strength, dropping around 2.5% since the election, but held steady on Monday at $1.2622.
At least seven Fed officials are due to speak this week as well as a number of European central bankers.
The data calendar for the U.S. is light this week, but the UK, Japan and Canada all have important inflation reports due, while manufacturing surveys out late in the week will offer a clue to how sentiment is faring since the U.S. election.
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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