Dollar Struggles To Gain Footing In Thin Trade; Yen Steady  

In the post-holiday trading quiet, the US dollar grappled with signals of receding inflation, potentially paving the way for Federal Reserve interest rate cuts in the upcoming year. Simultaneously, the Japanese yen steadied near a recent five-month peak, fueled by speculation that the Bank of Japan (BOJ) might signal an end to its ultra-easy monetary policy, which had kept the Japanese currency under pressure amid global central banks’ aggressive rate hikes in 2022 and 2023.

Currency markets experienced a subdued atmosphere as Australia, New Zealand, and Hong Kong observed the Boxing Day holiday. The euro faced a marginal 0.06% decline against the US dollar, hovering at $1.1019, near the four-month peak of $1.1040 reached the prior week. Sterling held its ground at $1.2701, while the Australian and New Zealand dollars remained close to their recent five-month highs.

The dollar index, lingering near a five-month low at 101.65, reflected recent data indicating a November decline in US prices, the first in over 3.5 years. This drop pushed the annual inflation increase below 3%, heightening expectations of a Federal Reserve interest rate cut in March. Wells Fargo analysts acknowledged the Fed’s progress in tackling inflation, though emphasizing ongoing efforts toward the 2% target.

In Asia, the yen strengthened 0.1% to 142.20 per dollar, supported by BOJ Governor Kazuo Ueda’s comments hinting at a potential policy shift. Governor Ueda noted a rising likelihood of achieving the inflation target, hinting at policy changes if sustainable progress toward the 2% goal continued. However, he clarified no specific timing for altering the ultra-loose monetary stance had been decided.

RBC Capital Markets’ Alvin Tan noted Governor Ueda’s speech lacked explicit policy guidance but expressed optimism about Japan moving beyond its low-inflation environment. Additional data revealed Japan’s steady jobless rate at 2.5% in November, and business-to-business service inflation maintained a 2.3% level last month.

In other developments, the New Zealand dollar gained 0.1% to $0.63145, while the Australian dollar last traded at $0.68065. As markets navigate these nuances, the global economic landscape awaits potential shifts in monetary policies and their ramifications in the new year.

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