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Dollar slips back, yen holds ground ahead of BOJ meeting

Published 12/18/2023, 04:38 AM
© Reuters.
- - The U.S. dollar edged lower in early European trade Monday, while the Japanese yen gave back some of last week’s gains ahead of the conclusion of a key policy meeting by the Bank of Japan.

At 05:35 ET (09:35 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% lower at 102.052, after dropping roughly 1.3% last week.

Fed’s dovish pivot hits the dollar

The dollar retreated sharply last week after the U.S. Federal Reserve pivoted towards rate cuts at its latest policy meeting, with traders now fully expecting an interest rate reduction at least by the start of summer next year.

The U.S. economic data slate is largely empty Monday, and the week’s focus will be on the personal consumption expenditures price index, the Federal Reserve’s favorite gauge of inflation, on Friday, which is likely to show easing consumer price pressures.

Ahead of that Chicago Fed President Austan Goolsbee later Monday and Raphael Bostic on Tuesday will give their views on future policy.

“The last few days of market action, before volumes dry up for Christmas, should continue to revolve around the ‘tug of war’ between Fed officials trying to temper rate cut speculation and investors who have instead seen a validation of dovish bets from last week’s Dot Plot projections,” said analysts at ING, in a note.

Yen steadies ahead of BOJ meeting

Elsewhere, USD/JPY traded 0.1% higher at 142.30, with the Japanese yen giving back some of last week’s nearly 2% gains.

The Bank of Japan concludes its two-day monetary policy meeting on Tuesday, with traders uncertain of when the dovish central bank starts to unwind its ultra-loose policy settings.

“Bank officials have already tempered rate hike expectations for this month by saying such a move is still premature,” ING added. “Still, with investors now actively betting on the end of negative rates in January, the language at this meeting will be key for the short-term performance of the yen.”

Euro still weighed by weak German outlook

EUR/USD rose 0.3% to 1.0922, with the euro boosted by the relatively hawkish nature of comments from the European Central Bank last week, when compared with the dovish pivot from the Fed.

That said, the single currency continues to be weighed by a darkening growth outlook in the eurozone, typified by German business morale unexpectedly worsening in December, according to data from the Ifo institute.

The Ifo business climate index stood at 86.4 in December, a retreat from the revised reading of 87.2 in November.

"As the year draws to a close, the German economy remains weak," Ifo president Clemens Fuest said.

GBP/USD rose 0.1% to 1.2687, ahead of the latest U.K. inflation data later this week. 

U.K. consumer prices are expected to have risen 4.3% in November on an annual basis on Wednesday. While this represents a drop from 4.6% the previous month, it’s still more than double the BoE’s 2% medium-term target, making rate cuts a more distant prospect.

Elsewhere, USD/CNY traded 0.2% higher at 7.1318, while AUD/USD rose 0.6% to 0.6734, as the Aussie dollar, a major indicator of risk sentiment, remained in a buoyant mood.


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