US Inflation Relief Affects Dollar and Yen Movement Ahead of BOJ Meeting

SINGAPORE (Reuters) - The U.S. dollar has seen a decrease in value on Thursday, moving down from its recent highs due to the latest U.S. inflation data, which pointed towards relief from rising prices. This easing was reflected in lower bond yields, and it has allowed the Japanese yen to strengthen, reaching its highest level in a month.

The yen was the most significant currency movement against the dollar in the past 24 hours, appreciating nearly 1% and continuing to rise during Asian trading hours. This shift has been supported by increasing expectations of a rate hike in Japan, coinciding with the relief provided by the U.S. inflation figures that improved the outlook for Federal Reserve rate cuts.

At one point, the yen traded as high as 155.21 against the dollar, marking its peak since December 19. The U.S. dollar also gave back some of its recent advancements against other currencies, including the Australian and New Zealand dollars. The dollar reached a week-long high of $0.6248 during the morning sessions in Asia.

Meanwhile, the euro remained relatively stable, changing hands at approximately $1.0298, while the dollar continued to dip for the fourth consecutive session, easing to 109.02.

Despite the positive news regarding a ceasefire deal in Gaza, foreign exchange markets showed little reaction. However, the Israeli currency did achieve a one-month high.

The core U.S. inflation rate for December rose by 0.2% month-on-month, aligning with forecasts but lower than November's increase of 0.3%. The annualized figure was calculated at 3.2%, slightly cooler than the expected 3.3%. This decrease in inflation followed a similarly lower-than-expected inflation rate in the UK, coupled with comments from a Bank of England official suggesting that it might be time to reduce interest rates.

In light of these events, traders relieved about inflation worries began purchasing stocks, leading to a drop of over 13 basis points in benchmark 10-year Treasury yields. Still, the immediate impact on the currency market was somewhat muted. The dollar index remains up 0.5% for January, and if this trend continues, it could mark four consecutive months of gains. After the inflation data was released, markets adjusted to include an additional 10 basis points of anticipated Federal Reserve easing this year, factoring in around 37 basis points of cuts.

According to Tim Baker, a macro strategist at Deutsche Bank, while the dollar seems to have outperformed recent rate spreads, the extent of this move is not overly significant. He noted, "The dollar should build in risk premium given the geopolitical backdrop." He added that it is common for the dollar to exhibit strength when the U.S. economic growth is performing better than that of other countries.

Market participants are keeping an eye on the upcoming inauguration of Donald Trump on Monday, which could lead to various executive orders, particularly regarding tariffs, that might influence asset prices and the value of the dollar significantly.

Mizuho economist Vishnu Varathan suggested that the strength of the dollar may reflect concerns regarding potential tariffs from Trump’s administration. The Chinese yuan faced challenges, remaining near the weaker end of its trading band at 7.3312 during early trading.

The New Zealand dollar held at $0.5623, close to its two-year low of $0.5543 witnessed earlier in the week, while the Australian dollar remained near a five-year low, receiving only temporary support from robust employment figures released on Thursday.

The British pound experienced a minor decrease to $1.2233 in Asian markets, with small currencies facing similar hardships. The Indonesian rupiah reached a six-month low on Wednesday following a surprise rate cut from the Bank Indonesia, while South Korea's won failed to gain momentum despite the central bank's decision to keep its benchmark rate steady at 3% against expectations for a cut.

Looking ahead, investors are anticipating Chinese economic growth figures due on Friday and a Bank of Japan meeting next week. Recent statements from BOJ Governor Kazuo Ueda and his deputy Ryozo Himino have underscored that the possibility of a rate hike will at least be discussed, with markets assigning about a 74% likelihood of a 25 basis point rise in short-term interest rates to 0.5%.inflation, currency, BOJ