The U.S. dollar has been under pressure recently, impacted by cooling inflation data. Core U.S. inflation in December rose 0.2% month-on-month, aligning with forecasts and marking a slowdown from November’s 0.3%. Annually, inflation hit 3.2%, slightly below the expected 3.3%. This relief in inflation heightened expectations for Federal Reserve rate cuts, pushing the dollar lower and bond yields down significantly.
The Japanese yen surged to a one-month high, trading as firm as 155.21 per dollar. Rising speculation about potential Bank of Japan (BOJ) rate hikes bolstered its strength. Deputy Governor Ryozo Himino recently hinted at the possibility of rate increases during the upcoming policy meeting. This statement, coupled with sustained wage growth and inflation consistently exceeding the BOJ's 2% target, fueled optimism among traders.
Japan’s economy has shown signs of moderate expansion, growing 1.2% annually in Q3, supported by stable consumer spending and labor market conditions. The BOJ previously ended its negative interest rate policy in March and raised the short-term policy rate to 0.25% by July. With the next policy meeting scheduled for January 23-24, markets are closely watching Japan’s monetary stance.
Cooling inflation also influenced other currency markets. The Australian dollar hit a one-week high of $0.6248, while the euro remained steady at $1.0298. Traders adjusted their expectations for further interest rate cuts in the U.S., pricing in 37 basis points of easing this year.
Meanwhile, geopolitical developments, such as the ceasefire agreement in Gaza, had limited direct impact on forex markets. However, the Israeli shekel reached a one-month high, reflecting localized optimism.
Despite recent fluctuations, the dollar index remains 0.5% stronger for January. If sustained, this marks its fourth consecutive monthly gain. Traders are balancing global inflation trends, interest rate shifts, and geopolitical factors to navigate volatile forex markets.
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Cooling U.S. inflation weakened the dollar, while the yen surged ahead of BOJ rate hike speculations. Explore the latest forex updates!
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