Dollar steady with US inflation, Fed meeting eyed; yuan heavy

U.S. Dollar and Chinese Yuan banknotes are seen in this illustration picture taken June 14, 2022. REUTERS/Florence Lo/Illustration/File photo

SINGAPORE  – The dollar started Monday on the front foot, with a reading on U.S. inflation and the Federal Reserve’s last policy meeting for the year likely to set the tone for the week, while rising deflationary pressure in China leant on the yuan.

The greenback pushed back above 145 yen and last bought 145.12 yen, reversing some of its steep fall against the Japanese currency late last week, as bets grew that the Bank of Japan’s ultra-low interest rates policy may be nearing an end.

Sterling dipped 0.02 percent to $1.2545 and was huddled near Friday’s two-week low of $1.2504.

Data on Friday showed U.S. job growth accelerated in November while the unemployment rate fell to 3.7 percent, underscoring the resilience of the labour market in the world’s largest economy and challenging expectations of imminent rate cuts from the Fed beginning early next year.

“They were a good set of numbers,” said Joseph Capurso, head of international and sustainable economics at Commonwealth Bank of Australia (CBA).

“Wages were still running probably too hot for the Fed to be comfortable and the unemployment rate fell – that was a really big surprise.”

The figures caused traders to push back expectations of how soon the Fed could begin cutting rates, with many now leaning toward May instead of March.

The euro rose 0.06% to $1.0767 but stood not too far from Friday’s more than three-week low of $1.07235, while the dollar index steadied at 103.95.

The index gained more than 0.7 percent last week, reversing three weeks of loss.

Focus now turns to the Federal Open Market Committee (FOMC) policy meeting later this week and U.S. inflation data due ahead of that, where expectations are for consumer prices to continue easing on an annual basis.

“The big influence on the U.S. dollar this week is going to be the FOMC meeting, in particular Chair (Jerome) Powell’s comments at his press conference,” said CBA’s Capurso.

“If he’s (hawkish), I think markets will probably ignore him and the U.S. dollar remains steady. But if he’s dovish, then I think the U.S. dollar and bond yields will fall, so it’s an asymmetric reaction.”

China struggles

In Asia, data over the weekend showed China’s consumer prices fell at the fastest pace in three years in November while factory-gate deflation deepened, indicating increasing deflationary pressure as weak domestic demand casts doubt over the country’s economic recovery.

The offshore yuan languished near a three-week low and last stood at 7.1842 per dollar, though movement was largely subdued in early Asia trade.

“It is important to note that the main drag to China’s headline inflation remains food prices. Nonetheless, the lack of a strong revival in the economy suggests that weak inflation will persist, and more policy support is indeed required,” said Alvin Tan, head of Asia FX strategy at RBC Capital Markets.

The latest numbers add to recent mixed trade data and manufacturing surveys that have kept alive calls for further policy support to shore up growth.

The Australian dollar, often used as a liquid proxy for the yuan, was little changed at $0.6577, while the New Zealand dollar was last 0.11 percent higher at $0.6128.