Published by Ankur Banerjee
SINGAPORE (Reuters) – The dollar was steady on Monday after U.S. inflation data showed only a modest increase last month, easing some concerns about the pace of U.S. rate cuts next year, while the yen near 156 per dollar, raising the possibility of intervention.
Investor sentiment was lifted when the US government stalled on spending legislation in Congress early Saturday.
In a holiday-shortened week, trading volumes are likely to narrow as the end of the year approaches.
The Federal Reserve last week surprised markets by predicting a measured pace of rate cuts ahead, sending Treasury yields and the dollar soaring while casting a shadow over economies others, especially emerging markets.
But Friday's data on the Fed's favorite inflation gauge showed a moderate monthly rise in prices, with a measure of core inflation posting the smallest gain in six months. That eased some concerns about what the Fed might cut in 2025.
However, the annual increase in core inflation, excluding food and energy, remained firmly above the US central bank's target of 2%.
Vasu Menon, managing director of investment strategy at OCBC, said the Fed's move has brought back the specter of inflation, which is likely to keep investors on edge.
“If US inflation proves to be more resilient than expected in the coming months, especially with Trump's policies, a more hawkish Fed stance could curb near-term market volatility,” Menon said. .
Traders are pricing in 38 basis points of rate cuts next year, shy of the two 25 bp rate cuts projected last week. The Fed had projected four cuts for 2025 in September. Market prices have pushed the first discount of 2025 out to June, with a March price cut of around 53%.
Moving expectations around rate cuts have left the , which measures the US currency against six of its major peers, steady at 107.78 on Monday, close to a two-year high of 108.54 touched on Friday.
The euro weakened at $1.0434, near a two-year low it touched in November, and is down 5.5% this year.
YEN FRAIL AGAIN
The dollar's rise, along with the Bank of Japan's stance last week and Governor Kazuo Ueda's comments to reduce the amount of Japanese rate hikes next month, have left the yen rooted near weak levels that ' could prompt the authorities to intervene.
The yen was easier at 156.65 per dollar, near a five-month low it touched on Friday. The yen's slide has prompted verbal warnings from authorities in Tokyo, with analysts expecting more jawboning before the end of the year.
In another turbulent year, the yen broke multi-decade lows in late April and again in early July, sliding to 161.96 per dollar and prompting interventionist strikes from Tokyo. It then touched 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 large interest rate gap that continues despite the Fed's rate cuts. It is down more than 10% this year against the dollar and is set for a fourth straight year of decline.
“The sensitive element is that we are now entering a period of thinner liquidity, so policymakers and market participants must deal with the increased risk of rapid movements that could push the yen to levels that have led to intervention in the past,” said Kyle Rodda. , senior financial market analyst at Capital.com.
“Friday's US inflation data will help Japanese authorities because the yen's depreciation is essentially about upside risks to inflation and rates in the United States.”
In other currencies, sterling was slightly ahead at $1.2582, while the Australian and New Zealand dollars were on a firmer footing after touching two-year lows last week. (AUD/)
The latter sought $0.6258, while it was at $0.5657.
In cryptocurrencies, bitcoin was slightly lower at $94,215.
