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by Tom Westbrook
SINGAPORE (Reuters) – The dollar slipped to a recent high on Thursday as slowing U.S. inflation data knocked bond yields, while the yen hit a one-month high on rising Japanese rates.
The yen was the biggest overnight mover against the dollar, rising about 1% and extending gains in Asia, as U.S. inflation raised chances of a Federal Reserve rate cut and next week’s Bank of Japan hike coincided with murmurs.
The yen traded as strong as 155.21 against the dollar, its strongest since Dec. 19. The greenback gave back some recent gains against the Australian and New Zealand dollars and hit a one-week high of $0.6248 in Asian morning.
The euro is fairly stable and last traded at $1.0298. It eased slightly for the fourth straight session on Thursday, heading lower to 109.02.
Foreign exchange markets reacted less directly to the announcement of the Gaza ceasefire, although Israel touched a one-month high.
Core U.S. inflation was 0.2 percent month-on-month in December, in line with forecasts and below November’s 0.3 percent. Annually, the reading of 3.2% was cooler than expected for 3.3%. This is a softer-than-expected UK inflation reading and the Bank of England policymaker commented that it is the right time to cut interest rates.
Inflation eased traders, buying stocks and sending the benchmark 10-year Treasury down more than 13 basis points, although currency market reactions were slightly muted.
The dollar index remains 0.5% stronger in January and would post four consecutive monthly gains if it continues. Markets priced in an additional 10 bps by the Federal Reserve, counting on a 37 bps cut this year after inflation data.
“Of course, he said that the value of the dollar has been overextended lately. Deutsche Bank (ETR:) macro strategist Tim Baker in a note.
“But it’s not all that big,” he said. “The dollar should build with a risk premium given the geopolitical backdrop.
“Furthermore, when US growth is outpacing its peers at this rate, it is also entirely normal to see dollar strength – and in previous quarters, the dollar has outperformed this relationship.”
Markets are likely to boost asset prices and the dollar on Monday’s highly anticipated executive orders, particularly tariffs, on Donald Trump’s inauguration.
The dollar’s strength may partly reflect fears of Trump 2.0 (tariffs), he said. Mizuho (NYSE: ) economist Vishnu Varathan.
Appearing on the front lines of the tariff risk, it did not catch much of a break and was at the weak end of the trading group at 7.3312 in pre-trade. (CNY/)
The New Zealand dollar, at $0.5623, is still close to Monday’s two-year low of $0.5543 and Australia remains at a near five-year low, getting a brief boost from strong employment figures.
Sterling fell slightly to $1.2233 in Asia and there was not much relief for smaller currencies.
The Indonesian rupiah hit a six-month trough on Wednesday following a surprise rate hike from Bank Indonesia. South Korea’s gains on Thursday took little encouragement, defying expectations for the central bank to leave its benchmark rate unchanged at 3%.
In addition to the start of Trump’s presidency, markets are looking forward to China’s growth figures on Friday and the Bank of Japan’s meeting next week.
Recent comments from BOJ Governor Kazuo Ueda and his deputy Ryozo Himino made it clear that a hike would at least be discussed and that markets have a 74% chance of a 25 basis point increase in short-term rates to 0.5%.
