NEW YORK, Jan 3 (Portal) – The dollar rose on Tuesday before the Federal Reserve released minutes of its December meeting on Wednesday, while the euro was weakened by slowing inflation data.
The US Federal Reserve slowed the pace of rate hikes to 50 basis points last month after making four consecutive 75 basis point hikes, but stressed the need to keep rates in a restrictive zone to bring down inflation.
Investors will be alert for signs of how concerned the Fed is about ongoing inflation and its thoughts on the jobs market, although meeting minutes may not move the market as much as upcoming jobs and inflation data, said Bipan Rai, CIBC’s North American head of FX strategy Capital Markets in Toronto.
A still-robust employment picture is believed to give the Fed more leeway to continue raising rates as it struggles to bring down stubbornly high inflation. The much-awaited December jobs report is due Friday and consumer price data for the last month will be released on January 12th.
Fed funds futures traders are pricing in rate cuts this year, even as the Fed maintains a hawkish tone, with the Fed funds rate expected to peak at 4.98% in June before falling by June falls back to 4.57% at the end of the year.
The dollar was last up 0.82% against a basket of currencies at 104.49, although Rai warned against discounting too much on the move as liquidity is relatively thin as investors returned from the holiday.
Tuesday’s data showed that US construction spending rebounded unexpectedly in November, buoyed by gains in non-residential housing, but single-family home construction continued to be hit by higher mortgage rates.
The greenback may have been buoyed by safety buying after earlier data showed China’s factory activity fell more sharply in December as rising COVID-19 infections disrupted production and weighed on demand.
The Australian and New Zealand dollars, which are sensitive to Chinese growth, were both recently down around 0.90%.
The euro was also down 0.92% to $1.0567 after states’ inflation data showed that price pressures had eased in December, suggesting national inflation may have slowed for a second month as well, in part is due to the one-off payment of household energy bills by the government.
Scotiabank noted that January is typically a strong month for the US currency.
“USD’s strong start to the new calendar year is very consistent with longer (and shorter) term seasonal trends, which typically see a USD rally in January – its strongest month of the year in the last 25 years or so,” said Shaun Osborne, chief FX strategist at Scotiabank, in a report.
He added that the dollar’s recent weakness is likely overdone even in the near term.
Meanwhile, the yen slipped slightly on the day to 130.77 after previously hitting a six-month high of 129.51 against the US currency.
The rally followed a Nikkei report on Saturday that said the Bank of Japan was considering raising its inflation forecasts in January to show price growth close to its 2% target in FY2023 and FY2024.
Speculation that the BOJ was beginning to back away from its ultra-loose policy flared in December, when the central bank widened the range of the yield cap on 10-year Japanese government bonds.
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Currency bid prices at 15:00 (2000 GMT)
Reporting by Karen Brettell; Additional reporting by Samuel Indyk in London; Editing by Lisa Shumaker
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