Dollar bound by tepid US inflation, yen weak ahead of BOJ By Reuters
Written by Tom Westbrook
SINGAPORE (Reuters) – Major currencies held their gains on Thursday against the dollar on softer-than-expected U.S. inflation, with the yen holding steady ahead of a Bank of Japan meeting, as U.S. policymakers signaled rates will be kept high for a while yet.
Overnight the euro advanced 0.6% and broke above its 200-day moving average, last bought at $1.0804. The dollar was at $0.6647, after rising more than $0.67 overnight, and the New Zealand dollar jumped to a five-month high above $0.62 before reaching $0.6170. The yen fell about 0.2%.
The gains were bigger after the US inflation report, which showed consumer prices were down month-on-month in May against market expectations of a 0.1% rise.
They were considered as the Federal Reserve left the funds rate at 5.25-5.5% and policymakers’ expectations for a rate cut this year fell to one, from three in March.
Sterling rose 0.5% overnight to $1.2798, and fell further as European markets opened. Movement was modest in Asian trade, although depreciated currencies such as the Indonesian rupiah saw some relief.
Despite the Fed’s projections, markets are holding on to a rate cut of about 25 basis points this year.
“I think the markets see the US dollar as weakening, with volatility in the middle,” Westpac strategist Imre Speizer said in Auckland. “That’s (mainly) due to Fed rate cuts, which are still on sale this year.”
it was steady at 7.2660 in offshore trade, gaining little against the dollar overnight.
Fed Chairman Jerome Powell struck a chord in his press conference and stressed that policymakers will be sensitive to economic data. Although smaller cuts were expected this year, policymakers had them penciled in for 2025 or 2026.
“While the view of a rate cut was more intense than in (March) we think the data moderates that hawkishness,” said John Velis, chief US strategist at BNY, noting that 8 of 19 policymakers’ estimates were for a double cut this year.
Still, it was cold comfort for the yen, which struggled to decline while the gap widened between Japan’s near-zero rates and the US’s record high short-term rates.
The Bank of Japan wraps up a two-day policy meeting on Friday and markets are awaiting an announcement or sign that the bank will pull back from massive bond purchases to allow for further rises in Japanese yields.
That leaves the yen vulnerable to a depreciation. It ended volatility at 157.08 to the dollar and on the back foot from the crosses – where it hit a 17-year high of 97.06 overnight and a 16-year low of 200.91 to sterling.
“We expect the BOJ to miss expectations, which could lower Japanese interest rates and the yen,” said Commonwealth Bank of Australia (OTC:) chief currency strategist Kristina Clifton.
“Communications from BOJ officials suggest it wants to take its time adjusting its policy settings again.”
