By Stefano Rebaudo and Tom Westbrook
(Reuters) – On Thursday, the U.S. dollar found its footing despite U.S. bond yields taking a nosedive following the previous day’s inflation data. Market conversations have now pivoted to Donald Trump’s upcoming presidential inauguration and the potential inflationary consequences of his future policies.
In contrast, the yen gained ground against both the dollar and the euro, as investors are gearing up for a possible rate hike by the Bank of Japan in the upcoming week.
Looking at the numbers, core U.S. inflation in December decreased to 0.2% month-on-month from November’s 0.3%, aligning with expectations, while the year-on-year 4.2% mark underperformed against the projected 3.3%.
The financial markets reacted with a sense of relief; traders, worried about rising inflation, showed renewed confidence by snapping up stocks and pushing benchmark 10-year Treasury yields down by more than 13 basis points.
Currency movements, however, were comparatively subdued. The U.S. dollar index edged up slightly by 0.05%, standing at 109.09.
A key focus for the day was Scott Bessent’s nomination hearing for the position of Treasury Secretary before the Senate Finance Committee. Bessent is looked upon to manage U.S. budget deficits and wield tariffs as a tool in negotiations, which could potentially counterbalance the expected inflationary measures from the incoming Trump administration.
In the currency markets, there wasn’t much response to the Gaza ceasefire deal, although the Israeli shekel hit a one-month peak on Wednesday.
Analysts pointed out that, while U.S. consumer price data surpass expectations, inflation remains above the Federal Reserve’s target, hovering around 3%. This has given the bond market a reason to test the waters with lower yields, though it is unlikely to dive deeper.
Allison Boxer, an economist at PIMCO, noted, “Core services inflation eased in December, but core inflation is still above what the Fed aims for,” indicating they haven’t altered their core inflation forecasts based on these latest figures.
The yen saw a 0.25% rise against the dollar, reaching 155.21 after touching a low since December 19. It also climbed 0.24% against the euro, reaching 160.63.
Recent comments from Bank of Japan Governor Kazuo Ueda and his deputy, Ryozo Himino, suggest that a rate hike will at least be on the table at next week’s monetary policy meeting, with markets anticipating a 78% chance of a 25 basis point increase and 50 bps of hikes by the end of the year.
According to analysts, the BoJ’s increasing interest rates should provide some support to the yen, but any significant moves will likely remain subdued ahead of Trump’s inauguration on Monday.
Japan’s annual wholesale inflation held steady at 3.8% in December, maintained by stubbornly high food prices, as reported on Thursday.
Chris Turner, head of forex strategy at ING, remarked, “The yen has been outperforming partly due to expectations of a BoJ hike and possibly because of fears of further forex intervention in the 158/160 range,” suggesting this trend might persist as the BoJ meeting approaches. “However, any dips might be short-lived, possibly bottoming out in the 153/155 area.”
Meanwhile, the euro nudged up by 0.05% to $1.0294.
China’s yuan, which is particularly vulnerable to tariff threats, stayed near the lower end of its trading range at 7.3487 throughout the Asian trading session.
Sterling slipped 0.3% to $1.2212 following British inflation figures that fell short of expectations, coupled with a Bank of England policymaker’s remarks indicating now might be the time to lower interest rates.
The pound briefly fell further when data revealed that the UK’s economic output rose for the first time in three months in November, but not as much as anticipated.
Over in Indonesia, the rupiah fell to a six-month low, reacting to Wednesday’s unexpected rate cut by Bank Indonesia.
Meanwhile, South Korea’s won didn’t experience a lift even after the central bank surprised analysts by keeping the benchmark rate unchanged at 3% on Thursday.
(Reported by Stefano Rebaudo and Tom Westbrook; Edited by Saad Sayeed, Kate Mayberry, and Tomasz Janowski)
