Following a Seven-Month Low, Dollar Stabilises, With All Attention on the Jpy

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The dollar started the week on the defensive, sliding to a seven-month low against a basket of major rivals in Asian trade as traders upped their bets that the Bank of Japan would change its yield control policy further. The yen was given particular attention.

While the euro reached a record nine-month high of $1.0874 in early trade before sliding to $1.0861, down 0.16% at 0920 GMT, the Australian dollar broke over the critical $0.7000 threshold for the first time since August.

“Every G10 currency gained versus the U.S. dollar last week helped by the U.S. inflation data for December, which confirmed a continued easing in inflation pressures that reinforces the prospect of the Fed pausing its tightening cycle, possibly after the March FOMC meeting,” mentioned MUFG analysts in a note.

The dollar index, which measures the dollar’s value against a basket of currencies, fell to a seven-month low of 101.77 thanks to early strength from the British pound and the Japanese yen. This continued the selloff last week after information revealed that U.S. consumer prices fell in December for the first time in more than 2-1/2 years.

The Fed’s rapid rate rises were one of the main reasons for the dollar index’s 8% surge last year.

The markets are currently pricing in a 91% chance of a 25-basis-point increase and a 9% potential of a 50-basis-point growth when the Fed makes its policy decision in February.

In European trading, the dollar remained steady and gained ground on the pound, most recently down 0.4% at $1.2185.

The Japanese yen has been a particular focus for currency markets this week due to predictions that the Bank of Japan will further alter or abandon its yield control policy during its meeting.

The dollar hit a more than seven-month low early in trade against the yen before recovering and closing at 128.35 yen, up 0.4%.

“I think the whole world will be focused on Wednesday … and probably the week in G10 (currencies) will be defined by what happens to the yen and yen crosses, out of that,” said Ray Attrill, head of F.X. strategy at National Australia Bank (NAB).

“I don’t think (the BOJ) has the luxury of time to say that they’re going to assess and wait until Q2 or Kuroda to see out his term without making any further changes.”

Haruhiko Kuroda, the governor of the BOJ, will leave office in April.

The BOJ has come under pressure from investors to change its ultra-accommodative monetary policy, allowing the yield on Japan’s benchmark 10-year government bonds to move beyond the new ceiling for two sessions.

U.S. markets are closed on Monday for a holiday, making for thin trading.

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