Rate outlook sets dollar for fourth weekly gain; yen wobbles

LONDON/SINGAPORE  – The dollar index inched higher on Friday and was set for a fourth-consecutive weekly gain as investors braced for U.S. interest rates to be higher for longer after a set of strong U.S. economic data.

The yen fell after a volatile Asian day, with incoming Bank of Japan Governor Kazuo Ueda saying it was appropriate to keep ultra-loose monetary policy.

Strong U.S. jobs data and rhetoric from Federal Reserve officials this month about openness to higher rates if needed in the fight against inflation have resulted in the dollar erasing its year to date losses.

The dollar index, which measures the U.S. currency against six peers, was 0.1 percent higher at 104.71, hovering around the near seven-week high of 104.78 it touched on Thursday.

The index is now up 2.5 percent for the month.

“The dollar notching its fourth-consecutive week of gains highlights just how far the U-turn in the market narrative has gone as data this week continues to highlight strength in the U.S. economy and its underlying inflation drivers,” said Simon Harvey, head of FX Analysis at Monex.

This will likely be displayed yet again with January’s personal consumption expenditures price index – the Fed’s preferred inflation measure – due at 13:30 GMT, but markets will likely wait for more Fed comments and February data for further rate hikes repricing, Harvey added.

The market is pricing U.S. rates to peak in July at 5.35 percent and remain above 5 percent until the end of the year, having walked back expectations of a deep rate cut this year.

“We’re in a bit of a wait-and-see pattern in markets, with the dollar holding up firm and momentum largely driving minor moves in major currency pairs,” Harvey said.

The euro and sterling were about flat against the greenback at $1.0586 and $1.2021.

Ueda, Japan inflation

Incoming BOJ chief Ueda, who was nominated earlier this month in a surprise move, warned that uncertainties regarding Japan’s economic recovery remained “very high”, warranting the BOJ maintaining its ultra-loose monetary policy.

The yen was volatile, weakening 0.3 percent to 135.06 per dollar, after touching its highest since Monday in Asian trading hours.

“His neutral comments, coming against market’s hawkish expectations and together with the rising global yields, suggest the yen could embark on a weakening trend again once we are past this volatility,” said Charu Chanana, market strategist at Saxo Markets in Singapore.

Japan’s core consumer inflation hit a fresh 41-year high in January, putting renewed pressure on the central bank to phase out its massive stimulus programme.