The dollar stabilized on Thursday after slipping due to cooling U.S. inflation and declining bond yields, while the yen climbed to a one-month high amid increased expectations of a rate hike in Japan.
The yen was the most notable mover against the dollar following softer-than-expected U.S. inflation data. It extended its gains in Asian trading as the possibility of Federal Reserve rate cuts aligned with speculation about a Bank of Japan hike next week.
The yen strengthened to 155.21 per dollar, its highest level since December 19, marking a 1.2% gain over the past two sessions. Recent comments from BOJ Governor Kazuo Ueda and Deputy Ryozo Himino suggested that a rate hike would be a topic of discussion at next week’s policy meeting, with markets pricing in a 78% likelihood of a 25-basis-point increase.
“The fact that they are talking about hiking just ahead of the meeting could be a way of testing the waters,” said Bart Wakabayashi, branch manager at State Street in Tokyo.
The euro remained largely steady after the U.S. inflation report, trading at $1.0283 during the Asian session. The dollar made modest gains elsewhere, with the dollar index edging up slightly to 109.18 after three consecutive days of losses.
The foreign exchange markets showed little immediate reaction to the Gaza ceasefire agreement, though the Israeli shekel reached a one-month high on Wednesday.
Core U.S. inflation rose 0.2% month-on-month in December, aligning with forecasts and down from November’s 0.3%. On an annualized basis, inflation stood at 3.2%, slightly below expectations of 3.3%. This followed a softer-than-expected inflation reading in the U.K. and remarks from a Bank of England official advocating for lower interest rates. Traders, relieved by the inflation data, drove stocks higher and pushed benchmark 10-year Treasury yields down by over 13 basis points.
Currency reactions were more muted. While the yen extended its rally, other moves began to reverse on Thursday as traders focused on strong U.S. economic indicators and potential tariff measures tied to Donald Trump’s upcoming inauguration on January 20.
“The dollar has overshot rate spreads recently,” wrote Tim Baker, macro strategist at Deutsche Bank, in a note. “But the overshoot isn’t substantial. The dollar should also price in a risk premium given the current geopolitical environment. Historically, the dollar strengthens when U.S. growth outpaces its peers, as we’re seeing now.”
China’s yuan remained near the weaker end of its trading band at 7.3316 during the Asian session, reflecting tariff-related concerns.
The New Zealand dollar hovered at $0.5602, close to Monday’s two-year low of $0.5543, while the Australian dollar showed little sustained reaction to robust employment data. Although it briefly reached a one-week high of $0.6248, it slid below $0.62 as the session progressed, staying near Monday’s five-year low of $0.6131.
Sterling dipped 0.3% to $1.2212, and smaller currencies saw little reprieve. Indonesia’s rupiah fell to a six-month low following a surprise rate cut by Bank Indonesia on Wednesday. South Korea’s won, meanwhile, showed no significant gains despite the central bank’s decision to hold rates steady at 3% on Thursday, defying expectations of a cut.
