© Reuters. FILE PHOTO: U.S. dollar and euro banknotes are seen in this illustration taken July 17, 2022. REUTERS/Dado Ruvic/Illustration
SINGAPORE (Reuters) – The dollar was sharply lower on Tuesday ahead of an eagerly awaited inflation report, while the yen strengthened as Kazuo Ueda was a surprise nominee to be the next governor of the Bank of Japan.
Markets are looking to US consumer price index (CPI) data for further clues on the Federal Reserve’s policy outlook, with the headline number expected to rise 0.5% in January, according to a Reuters poll, after falling 0.1% in December .
which measures the US currency against six major rivals, weakened 0.107% to 103.09, after falling 0.34% overnight.
The index rose 1% in the month of February, but is far from the 20-year high of 114.78 it touched in September when the Fed was in the middle of its massive rate hike.
Since then, the Fed has reduced the pace of rate hikes. The US central bank raised interest rates by 25 basis points earlier this month, but said it had reversed course in its fight against inflation.
Moh Siong Sim, currency strategist at Bank of Singapore, said the foreign exchange market was in a holding pattern on Tuesday as the focus shifted to the CPI data.
The debate is currently on whether inflation will remain at 3 to 4% or decrease to 2% in line with earlier market expectations, Sim said.
“The outlook is moving towards a more reasonable estimate that we could be stuck at 3-4% and the Fed will have to do more.”
The market expects US interest rates to peak at around 5.2% in July and end the year at 4.9%, moving away from earlier expectations for an initial deeper rate cut later this year.
With Fed Chairman Jerome Powell reiterating that disinflation was underway last week, investors will look to Tuesday’s report to gauge the direction of prices.
Kristina Clifton, senior economist at Commonwealth Bank of Australia (OTC:), said there were temporary signs of cooling in US inflation, but said services inflation, which is strongly linked to wage growth, showed no signs of easing.
“Although the labor market remains tight and wage growth is very strong, there is a risk that we will get surprises in relation to core inflation numbers,” she said.
The euro rose 0.14% to $1.0735, after rising 0.435% in the previous session. Sterling
The Australian dollar added 0.10% to $0.697, while it fell 0.06% to $0.635.
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The Japanese government has named academic Kazuo Ueda as its choice for the next central bank governor, and investors are betting that the surprise choice could prevent an end to the unpopular yield control policy.
Ueda, a former member of the BOJ’s policy committee and an academic at Kyoritsu Women’s University, is considered an expert on monetary policy but has not even been seen as a black candidate for the top job.
National Australia Bank (OTC:) currency strategist Rodrigo Catril said Ueda was seen as a reasonable choice as he was not a fully committed “uber dove” and should have more flexibility as an outsider.
The Japanese yen gained 0.46% to 131.82 per dollar on Tuesday, after slipping 0.7% in the previous session.
The yen fell sharply to a 32-year low of 151.94 to the dollar last year as US rates rose and Japanese ones remained near zero, but has since recouped those losses as the Fed looks to pause its tightening as speculation mounts that the BOJ move away from its ultra-loose policy.
Data released on Tuesday showed Japan’s economy avoided recession but recovered much less than expected in October and December as business investment fell, meaning exiting stimulus will prove a challenge for the BOJ.
“We believe the modest recovery will continue this year, but today’s data supports the Bank of Japan’s argument that the recovery is still fragile and that easy monetary policy is needed,” ING economists said in a note.
“It will be difficult for the incoming new governor to start any normalization.”
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Bid prices in currency at 05:05 GMT
Description RIC Last US Close Pct Change YTD Pct High Bid Low Bid
Euro/Dollar $1.0739 1.0725 +0.12% +0.21% +1.0741 +1.0725
Dollar/Yen 131.8050 132.4250 -0.28% +0.63% +132.3550 +132.0100
Euro/Yen 141.54 141.98 -0.31% +0.88% +142.0500 +141.5700
Dollar/Swiss 0.9178 0.9197 -0.16% -0.70% +0.9195 +0.9180
Sterling/Dollar 1.2150 1.2141 +0.05% +0.45% +1.2151 +1.2137
Dollar/Canadian 1.3333 1.3333 +0.00% -1.60% +1.3353 +1.3330
Australian dollar 0.6971 0.6966 +0.07% +2.27% +0.6975 +0.6950
NZ 0.6348 0.6359 -0.14% +0.01% +0.6367 +0.6330
Information about the Tokyo Forex market from the BOJ