Written by Stefano Ribaudo and Tom Westbrook
(Reuters) – The US dollar steadied on Thursday despite a sharp decline in US bond yields following inflation data released on Wednesday, as market focus turned to the inauguration of Donald Trump as president and the potential inflationary impact of his policies.
Meanwhile, the yen rose against the dollar and the euro as investors expected the Bank of Japan to raise interest rates next week.
US core inflation fell to 0.2% month-on-month in December from 0.3% in November, as expected, while the annual reading of 4.2% came in below expectations of 3.3%.
Traders who had become more concerned about inflation responded with relief, buying stocks and pushing benchmark 10-year Treasury yields down more than 13 basis points.
The currency’s reaction was more subdued.
The US dollar index rose 0.05% to 109.09.
The highlight of the day is expected to be the nomination hearing for future Treasury Secretary Scott Bessent before the Senate Finance Committee.
Bescent is expected to maintain constraints on the US deficit and use tariffs as a negotiating tool, mitigating the expected inflationary impact of economic policies expected from the Trump administration.
There was little immediate reaction in foreign exchange markets to the Gaza ceasefire agreement, although the Israeli shekel touched its highest level in a month on Wednesday.
Analysts noted that US consumer price data was better than expected, but still showed inflation at around 3%, still above levels targeted by the Federal Reserve. These numbers have provided Treasuries with an excuse to conduct some negative testing of yields, but such a move is unlikely to go any further.
“Core services inflation was moderate in the December report, but overall core inflation remains above levels consistent with the Fed’s target,” said Alison Boxer, an economist at Pimco, arguing that the US figures did not change her forecast for core inflation.
The yen rose 0.25% against the dollar, after reaching 155.21, its lowest level since December 19. It rose 0.24% against the euro to 160.63.
Recent statements by Bank of Japan Governor Kazuo Ueda and his deputy Ryozo Himeno made it clear that a rate hike will at least be discussed at next week’s policy meeting, and markets see a 78% chance of a 25 basis point increase, while anticipating a 50 basis point hike. By the end of the year. [IRPR]
Analysts said the Bank of Japan’s tightening path will support the Japanese currency but the moves are likely to be contained before Trump’s inauguration on Monday.
Data showed on Thursday that the annual inflation rate for wholesale prices in Japan stabilized at 3.8% in December due to the continued rise in food costs.