During today's Asian trading, the US dollar declined slightly against major currencies, while market participants continued to focus on the Fed's monetary policy outlook. However, currency movements were largely mutated in the day after Christmas, as markets in the UK, Australia, New Zealand and Hong Kong, among others, were still out for a public holiday.
The US Dollar Currency Index (DXY), which tracks the dynamics of the dollar against six currencies (euro, swiss franc, yen, canadian dollar, pound sterling and swedish krona) fell by 0.07% to 101.63. Last week, the index fell by 0.83%, responding to weaker than expected US inflation data. The Commerce Department report showed that the core personal consumption expenditure price index - the Fed's preferred measure of core inflation - increased by 0.1% over the month and by 3.2% per annum. Economists had expected growth of 0.1% and 3.3%, respectively. In turn, the report from the University of Michigan confirmed the improvement in expectations regarding the prospects for inflation. Americans expect prices to rise by 3.1% over the next year, which corresponds to the preliminary figure and is the lowest value since March 2021. In addition, they expect prices to rise by 2.9% in the next 5-10 years, which is 0.1% higher than the preliminary figure. The inflation data strengthened bets that the Fed's interest rates will be cut by more than 150 basis points next year, which is twice the forecast of Fed policymakers. According to the CME FedWatch Tool, markets see a 76.3% probability of a 25 basis point rate cut at the Fed meeting in March 2024 and a 100% probability of a rate cut in May 2024.
The yen consolidated against the US dollar, remaining near a five-month high on the view that the Bank of Japan could soon mark an end to its ultra-easy policy. The yen was slightly influenced by statements by the head of the Bank of Japan, Kazuo Ueda, who noted that the probability of achieving the inflation target is "gradually increasing" and he will consider the possibility of changing policy if the prospects for sustainable achievement of the 2% target increase "sufficiently." Meanwhile, he warned that the Bank of Japan has not decided on a specific time frame for changing its ultra-loose monetary policy. Investors also analyzed Japan's data. The Ministry of Internal Affairs and Communications said that in November the unemployment rate was 2.5%, unchanged from October and confirming economists' forecasts. The latest reading is the lowest since January. Meanwhile, the jobs-to-applications ratio fell to 1.28 from 1.3 in October, reaching its lowest level since June 2022. A separate report from the Bank of Japan showed that services producer price inflation increased in November by 2.3% per annum, as in October. On a monthly basis, PPI services growth slowed to 0.2% from 0.5% in October. Also today, the Bank of Japan reported that core inflation eased to 2.7% in November from 3% in October. A similar lower rate was last reported in February.