Dollar Steady After Benign US Inflation Eases Worries Over Rates

By Ankur Banerjee

SINGAPORE (Reuters) – The dollar was steady on Monday after U.S. inflation data showed only a modest rise last month, easing some concerns about the pace of U.S. rate cuts next year, while the yen loitered near 156 per dollar, raising the possibility of intervention.

Investor sentiment was also lifted when a U.S. government shutdown was averted by congress’ passage of spending legislation early on Saturday.

In a holiday-curtailed week, trading volumes are likely to thin out as the year-end approaches.

The Federal Reserve last week shocked the markets by projecting a measured pace of rate cuts ahead, sending Treasury yields and the dollar surging while casting a shadow on other economies, especially in emerging markets.

Friday’s data on the Fed’s preferred gauge of inflation showed moderate monthly rises in prices, with a measure of underlying inflation posting its smallest gain in six months.

Still, the annual increase in core inflation, excluding food and energy, remained stubbornly well above the U.S. central bank’s 2% target.

Traders are pricing in 44 basis points of rate cuts next year, just shy of the two 25 bp rate cuts the Fed projected last week. It had projected four cuts in September. Market pricing has pushed the first easing of 2025 out to June.

That left the dollar index, which measures the U.S. currency against six of its largest peers, steady at 107.78 on Monday, near a two-year high of 108.54 touched on Friday.

The euro was languishing at $1.0434, near a two-year low it touched in November, and is down 5.5% this year.

“When optimism is rising and market multiples are expanding, it just takes a little fear to take the veneer off a market rally,” said Brian Jacobsen, chief economist at Annex Wealth Management.

“This year has had a number of setbacks that in hindsight were just bumps in the road. At the time they felt like existential crises. Perhaps the Fed talking about two cuts in 2025 instead of four is just another one of those bumps.”

The dollar’s rise, coupled with the Bank of Japan standing pat last week and Governor Kazuo Ueda’s comments reducing the odds of a Japanese rate hike next month, has 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 brought out verbal warnings from authorities in Tokyo, with analysts expecting more jawboning through the end of the year.

In what turned out to be another turbulent year, the yen breached multi-decade lows in late April and again in early July, sliding to 161.96 per dollar and spurring bouts of intervention 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 wide interest rate gap that persists despite the Fed’s rate cuts. It is down more than 10% this year against the dollar and set for a fourth straight year of declines.

“The precarious element is we are now entering a period of thinner liquidity, so policymakers and market participants have to deal with the elevated risk of rapid moves 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.

“The U.S. inflation data from Friday will help Japanese authorities because fundamentally the yen’s depreciation is about upside risks to inflation and rates in the United States.”

In other currencies, sterling was little changed at $1.25715, while the Australian and New Zealand dollars were on steadier footing after touching two-year lows last week. [AUD/]

The Aussie last fetched $0.6247, while the kiwi was 0.2% lower at $0.5645.

In cryptocurrencies, bitcoin was slightly lower at $94,215.

(Reporting by Ankur Banerjee in Singapore; Editing by Edmund Klamann)