By Rae Wee
SINGAPORE (Reuters) -The dollar’s towering rally hit a speed bump on Wednesday as traders turned cautious ahead of a closely watched U.S. consumer inflation report due later in the day, while the yen pulled ahead following remarks from Japan’s central bank chief.
Broad currency moves were modest on Wednesday, though the yen was a notable outperformer as it rose roughly 0.5% against the dollar on growing expectations that the Bank of Japan (BOJ) could deliver a rate hike at next week’s policy meeting.
The Japanese currency strengthened on the back of comments from BOJ Governor Kazuo Ueda, who said the central bank will raise interest rates and adjust the degree of monetary support if improvements in the economy and price conditions continue.
His remarks come just a day after deputy governor Ryozo Himino said the BOJ would debate whether to raise interest rates at next week’s policy meeting.
The yen was last 0.43% higher at 157.29 per dollar, with markets now pricing in a 70% chance of a 25-basis-point hike next week.
“We maintain our call for a 25bp hike at next week’s meeting,” said Citi economist Katsuhiko Aiba.
“The focus is on whether U.S. policy, particularly on tariffs, that could be announced after the U.S. Presidential inauguration and prior to the BOJ meeting will be benign for the Japanese and global economies and not cause turbulence in financial markets.”
TRUMP AND RATES
The main market event on Wednesday will be a reading on U.S. inflation, where investors are forecasting a 0.2% increase in core consumer prices on a monthly basis for December.
Any upside surprise could further limit the scope for Federal Reserve rate cuts this year.
The greenback stabilised in the Asian session after falling overnight and edging away from a more than two-year peak hit against a basket of currencies at the start of the week. The was last 0.03% lower at 109.17.
The dollar’s decline on Tuesday came in part due to a tame reading on U.S. producer prices, which pulled Treasury yields off their highs. [US/]
In other currencies, the euro was some distance away from a more than two-year trough and last bought $1.0301.
Sterling fell 0.08% to $1.2207, as it continues to come under pressure from rising borrowing costs at home and worries about Britain’s fiscal health.
UK inflation data is also due later in the day, which will be closely watched by investors as concerns about domestic price pressures and a weak economy put growing pressure on finance minister Rachel Reeves.
Wednesday’s U.S. inflation figures will come on the heels of last week’s blowout jobs report, which underlined the strength of the U.S. economy and led traders to heavily pare back bets of further Fed easing.
Still, analysts say any resultant impact on currencies from the inflation report is likely to be short-lived, given the market’s focus remains chiefly on U.S. President-elect Donald Trump’s impending return to the White House and his plans for tariffs in particular.
“Markets are still looking ahead to the incoming administration’s policies and the impact on prices,” said Carol Kong, a currency strategist at Commonwealth Bank of Australia (OTC:).
“Even though FOMC officials are sounding more cautious about rate cuts recently, they are actually not so alarmed by the recent inflation readings. They are actually more worried about the future prospect of inflation under a second Trump term.”
Ahead of Trump’s inauguration on Jan. 20, investors have been highly sensitive to headlines around his policy plans, which analysts expect will stoke inflation in the world’s largest economy.
The threat of tariffs along with expectations of fewer Fed rate cuts has in turn lifted Treasury yields and supported the greenback.
Elsewhere, the Australian dollar held to some of its overnight gains and was trading at $0.6189. The New Zealand dollar dipped 0.09% to $0.5599.
