Dollar Rebounds vs Yen; euro strengthens after inflation data
The dollar regained strength against the yen on Tuesday, recovering from Monday’s sell-off, even as expectations of a Bank of Japan interest rate hike in December remained, while the euro edged up after data showed euro zone inflation slightly higher than expected.
The US currency came under pressure late in the session after US President Donald Trump said the future Federal Reserve chairman was present as he introduced White House economic adviser Kevin Hassett at a White House meeting.
Earlier in the day, Trump said he would announce his choice to replace Jerome Powell as head of the Federal Reserve early next year.
Hassett will be viewed by many investors as a dovish choice to replace Powell, and thus his candidacy could weigh on the dollar.
The greenback was up 0.2% against the yen at 155.845, after hitting a two-week low on Monday, following a sale of 10-year Japanese government bonds that attracted the strongest demand since September.
“We’re basically back to square one before Ueda’s (Japan Central Bank Governor Kazuo) statement yesterday, which may be a little confusing considering swaps are still pricing in an 80% chance of a rate hike in December,” said Michael Brown, senior research strategist at Pepperstone.
Stocks, bonds, cryptocurrencies and the dollar all plunged on Monday after Ueda said Japan’s central bank would weigh the “pros and cons” of a rate hike at its next policy meeting, sending Japan’s two-year yield above 1% for the first time since 2008 and prompting a spillover into global bond markets.
“To me, this suggests that things are still very much USD-driven, with pressure on the dollar seen yesterday amid rising expectations that Hassett will get the Fed Chair post after providing slightly more rational conditions today, as market players refocus on the US growth outlook remaining solid, even with the Fed cutting interest rates by 25 basis points next week,” Brown said.
“It seems that, in the absence of a clear narrative, the greenback is back to being the ‘cleanest dirty shirt’ and enjoying healthy demand,” he said.
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Data on Monday showed manufacturing in the US was weaker than expected, adding to pressure on the Federal Reserve to lower interest rates this month.
Fed futures forecast an 87% chance of a 25 basis point rate cut at the Fed’s next meeting on Dec. 10, compared with a 63% chance last month, according to CME Group’s FedWatch tool.
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The euro rose 0.1% to $1.1624 after data showed inflation in the 20 countries that share the euro rose to 2.2% last month from 2.1% in October, a small rise that was unlikely to worry much for the European Central Bank.
Inflation in the eurozone is practically at the ECB’s target of 2%, ECB policymaker Joachim Nagel said in an interview published on Tuesday.
“This (inflation data) comes at a time when some people are claiming we could still see another cut from the ECB, even though their easing cycle is likely over,” said Joshua Mahony, chief market analyst at Scope Markets.
Sterling was flat today at $1.3211, after touching its highest level in a month on Monday.
The Bank of England (BoE) cut the amount of capital it estimates lenders must hold, in a bid to increase lending and stimulate the economy. This is the first reduction in bank capital requirements since the financial crisis.
Leading cryptocurrency Bitcoin rose 7% to $92,321, pulling away from a 10-day low touched in the previous session.
Source: Reuters (Reporting by Saqib Iqbal Ahmed in New York and Joice Alves in London; Additional reporting by Gregor Stuart Hunter in Singapore; Editing by Andrea Ricci, Nick Zieminski and Edmund Klamann)
