By Stefano Rebaudo and Tom Westbrook
(Reuters) – The U.S. dollar steadied on Thursday despite the sharp fall in U.S. bond yields after Wednesday’s inflation data as market focus shifted to Donald Trump’s presidential inauguration and possible inflationary impact of his policies.
Meanwhile the yen rose against the dollar and the euro as investors expected the Bank of Japan to hike rates next week.
Core U.S. inflation dipped to 0.2% month-on-month in December from 0.3% in November, as expected, while the annualised 4.2% reading came below the 3.3% forecast.
Traders who have been growing more worried about inflation responded with relief, buying stocks and sending benchmark 10-year Treasury yields down more than 13 basis points.
The currency reaction was more muted.
The U.S. dollar index was up 0.05% at 109.09.
The highlight of the day should be the nomination hearing of the future Treasury minister Scott Bessent in front of the Senate Finance Committee.
Bessent is expected to keep a leash on U.S. deficits and to use tariffs as a negotiating tool, mitigating the expected inflationary impact of economic policies expected from the Trump administration.
There was little direct reaction in foreign exchange markets to the ceasefire deal in Gaza, though the Israeli shekel did touch a one-month high on Wednesday.
Analysts flagged that the U.S. consumer price data was better than expected, but still showing inflation at around 3%, still above levels targeted by the Fed. The figures provided Treasuries with an excuse to do some downside testing for yields, but such a move is unlikely to go far.
“Core services inflation moderated in the December report, but overall core inflation remains above levels consistent with the Fed target,” said Allison Boxer, economist at PIMCO, arguing that U.S. figures didn’t change their forecasts for core inflation.
The yen rose 0.25% against the dollar, after hitting 155.21, its lowest level since Dec. 19. It was up 0.24% against the euro at 160.63.
Recent remarks from BOJ Governor Kazuo Ueda and his deputy Ryozo Himino have made clear that a hike will at least be discussed at next week’s policy meeting and markets see about a 78% chance of a 25 basis point increase, while pricing 50 bps of rate hikes by year-end. [IRPR]
Analysts said the BoJ tightening path will support the Japanese currency but moves will likely be contained ahead of Trump’s inauguration on Monday.
Japan’s annual wholesale inflation held steady at 3.8% in December on stubbornly high food costs, data showed on Thursday.
“Expectations of a BoJ hike and perhaps fears of more forex intervention in the 158/160 area have helped the yen outperform,” said Chris Turner, head of forex strategy at ING.
“We expect that to continue into next week’s BoJ meeting. However, dips may exhaust in the 153/155 area,” he said.
The euro was up 0.05% at $1.0294.
China’s yuan, seen on the front lines of tariff risk, was pinned near the weak end of its trading band at 7.3487 throughout the Asia session. [CNY/]
Sterling dipped 0.3% to $1.2212 after softer-than-expected British inflation reading and remarks from a Bank of England policymaker saying that the time was right to bring down interest rates.
It briefly extended its fall as data showed Britain’s economic output rose for the first time in three months in November but by less than expected.
Indonesia’s rupiah dropped to a 6-month low following Wednesday’s surprise rate cut from Bank Indonesia.
South Korea’s won, meanwhile, failed to see a boost from the central bank defying expectations for a cut to leave its benchmark rate on hold at 3% on Thursday.
(Reporting by Stefano Rebaudo and Tom Westbrook; Editing by Saad Sayeed, Kate Mayberry and Tomasz Janowski)
