Dollar steadies, yen gains ahead of BOJ meeting
By Tom Westbrook
SINGAPORE (Reuters) – The dollar steadied on Thursday after falling on cooling U.S. inflation and falling bond yields, while the yen hit a one-month high on rising bets on a rate hike in Japan.
The yen was the biggest loser against the dollar after softer-than-expected U.S. inflation data and it extended gains in Asia as the prospect of a Federal Reserve rate cut coincided with talk of a Bank of Japan hike next week.
The yen was trading at $155.21, its strongest since December 19. It has gained about 1.2% in the past two sessions.
Recent statements by BOJ governor Kazuo Ueda and his deputy Ryozo Himino made it clear that a hike will at least be discussed at next week’s policy meeting, and markets see a 25 basis point hike around a 78% chance.
“The fact that they’re talking about campaigns right now, right before the meeting, could test the waters,” said Bart Wakabayashi, manager of the State Street branch in Tokyo.
The euro was largely flat after U.S. inflation data and was steady at $1.0283 during the day in Asia, while the greenback edged up elsewhere and the dollar index snapped a three-day streak of losses to edge up slightly to 109.18.
There was no immediate reaction to the Gaza ceasefire agreement in foreign exchange markets, although the Israeli shekel did hit a one-month high on Wednesday.
US core inflation came in at 0.2% month-on-month, in line with forecasts and below November’s 0.3% annual rate of 3.3%.This followed softer-than-expected UK inflation reading and comments from a Bank of England policymaker who said the time was right to cut interest rates.
Traders worried about inflation reacted with relief, buying stocks and sending the benchmark 10-year Treasury yield up more than 13 basis points.
The currency response was a bit more muted and, apart from gains in the yen, began to weaken on Thursday as traders cautiously eyed still-strong US economic data and possible tariffs, as well as the January 20 inauguration of Donald Trump.
“Of course, the dollar has outperformed recently,” Deutsche Bank macro strategist Tim Baker said in a note.
“It’s also perfectly normal to see the dollar strengthen when US growth outperforms its peers by this much, and the dollar has outperformed this relationship in previous episodes.”
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