US inflation relief dents dollar, yen gains ahead of BOJ By Reuters

By Tom Westbrook

SINGAPORE (Reuters) – The dollar slipped from recent peaks on Thursday as data on cooling U.S. inflation pushed bond yields lower, while the yen hit a one-month high on rising bets on a rate hike in Japan.

The yen was the dollar’s biggest mover overnight, rising nearly 1% and extending gains in Asia as easing U.S. inflation increased the chances of a Federal Reserve rate cut and coincided with noise from the Bank of Japan for a hike next week.

The yen traded as high as $155.21 to the dollar, its strongest since December 19. The dollar also gave back some recent gains against the Australian and New Zealand dollars since December 19, and Asia morning at $0.6248. maxed out.

The euro ended fairly flat and last traded at $1.0298, a fourth straight session low on Thursday, easing slightly to 109.02.

Currency markets had little immediate reaction to the announcement of a cease-fire in Gaza, although the Israeli one did hit a one-month high.

US core inflation came in at 0.2% month-on-month, in line with forecasts and below the 0.3% annual rate of 3.3% expected.This followed a softer-than-expected reading on UK inflation and the Bank of England policymaker’s remarks that the time is 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, although the currency market’s reaction was slightly softer.

The dollar index remains 0.5% firmer in January and, if it holds, would post four straight monthly gains. :

“Of course, recently the dollar exceeds the exchange rate spread,” they said Deutsche Bank (ETR:) macro strategist Tim Baker notes:

“But it’s not that big,” he said. “The dollar should create a risk premium given the geopolitical backdrop.

“Then,” he said, “it’s also perfectly normal to see the dollar strengthen when U.S. growth outperforms its peers by this much, and in previous episodes the dollar has outperformed this relationship.”

Markets are eyeing Donald Trump’s inauguration day on Monday with a series of executive orders, particularly tariffs, that are likely to boost asset prices and the dollar.

“US strength may partly reflect Trump 2.0 (tariff) fears,” they said Mizuho (NYSE:) economist Vishnu Varathan.

seen at the forefront of rate risk, barely made a break and was near the weak end of its trading range at the 7.3312 level in early trade. [CNY/]

The New Zealand dollar, at $0.5623, was still near Monday’s two-year low of $0.5543, while Australia continued to hit a five-year low, getting only a brief boost from Thursday’s robust employment figures.

In Asia, sterling eased slightly to $1.2233, and there wasn’t much relief for smaller currencies.

The Indonesian rupiah hit a six-month low on Wednesday after a surprise rate cut by Bank Indonesia.South Korea’s won also didn’t get much of a boost after the central bank dismissed expectations that it would cut its benchmark interest rate by 3% on Thursday.

In addition to the start of Trump’s presidency, markets await China’s growth data due on Friday and the Bank of Japan’s meeting next week.

Recent statements from BOJ governor Kazuo Ueda and his deputy Ryozo Himino made it clear that a hike would at least be considered, and markets had priced in a near 74% chance of a 25 basis point hike in short-term interest rates to 0.5%.