Dollar steady after benign US inflation eases worries over rates By Reuters

Written by Ankur Banerjee

SINGAPORE (Reuters) – The dollar steadied on Monday after U.S. inflation data showed only a modest increase last month, easing some concerns about the pace of U.S. interest rate cuts next year, while the yen hovered near 156 to the dollar, raising the possibility of intervention.

Investor sentiment also rose when a US government shutdown was averted by Congress passing spending legislation early Saturday.

On a busy holiday week, trading volumes will likely decline as the end of the year approaches.

The Federal Reserve shocked markets last week by forecasting a measured pace of future interest rate cuts, sending Treasury yields and the dollar higher while casting a pall over other economies, especially in emerging markets.

Friday’s data on the Fed’s preferred measure of inflation showed moderate monthly rises in prices, with the core inflation measure posting its smallest gain in six months.

However, the annual increase in core inflation, excluding food and energy, remained well above the US central bank’s 2% target.

Traders expect interest rates to be cut by 44 basis points next year, slightly less than the two 25 basis point cuts the Fed expected last week. It expected four cuts in September. Market rates have pushed the first easing of 2025 to June.

That left the index, which measures the US currency against six of its largest peers, flat at 107.78 on Monday, close to the two-year high of 108.54 it touched on Friday.

The euro remained at $1.0434, near the two-year low it touched in November, and is down 5.5% this year.

“When optimism rises and market multiples expand, it only takes a little fear to peel the veneer off a market rally,” said Brian Jacobsen, chief economist at Annex Wealth Management.

“This year has seen a number of setbacks that in hindsight were just bumps in the road. At the time they felt like existential crises. Perhaps the Fed’s talk of two cuts in 2025 instead of four is just another one of those bumps.”

The dollar’s rise, coupled with the Bank of Japan remaining flat last week and comments by Governor Kazuo Ueda downplaying the odds of a Japanese interest rate hike next month, have left the yen rooted near weak levels that could prompt authorities to intervene.

The yen fell at 156.65 yen to the dollar, near the five-month low it touched on Friday. The yen’s decline led to verbal warnings from authorities in Tokyo, with analysts expecting more pressure until the end of the year.

In what turned out to be another turbulent year, the yen broke to multi-decade lows in late April and then again in early July, falling to 161.96 yen to the dollar, triggering bouts of intervention by Tokyo. It then reached a 14-month high of 139.58 in September before giving up those gains, and is now back near 156.

The currency has been under pressure from a strong dollar and a wide interest rate gap that persists despite interest rate cuts by the Federal Reserve. The pound has fallen more than 10% this year against the dollar and is heading for the fourth consecutive year of declines.

“The risky element is that we are now entering a period of weak liquidity, so policymakers and market participants will have to grapple with the increased risk of rapid moves that could push the yen to levels that have led to intervention in the past,” Kyle Rodda said. Senior Financial Markets Analyst at Capital.com.

“US inflation data released on Friday will help Japanese authorities because the yen’s depreciation is mainly related to upside risks to US inflation and interest rates.”

In other currencies, there was little change in the pound sterling at $1.25715, while the Australian and New Zealand dollars stabilized after touching their lowest levels in two years last week. [AUD/]

The latter achieved $0.6247, while it fell by 0.2% at $0.5645.

In cryptocurrencies, Bitcoin was slightly lower at $94,215.