The U.S. dollar weakened against the Japanese yen on Thursday, reaching a near one-month low, driven by softer-than-expected U.S. economic data and rising expectations that the Bank of Japan (BOJ) will raise interest rates in its upcoming policy meeting.
Yen Strengthens on BOJ Rate Hike Speculation
The Japanese yen gained strength as markets priced in a higher probability of a rate hike by the Bank of Japan. BOJ Governor Kazuo Ueda and his deputy, Ryozo Himino, have indicated that the central bank will at least discuss the possibility of a rate hike at next week’s policy meeting. The market now sees an approximately 79% chance of a 25-basis-point increase.
The yen surged to 155.2 against the U.S. dollar, its lowest level since December 19, falling 0.81%. Kristina Hooper, Chief Global Market Strategist at Invesco U.S., noted that while the dollar is likely to remain strong relative to many currencies, it is expected to be weaker against the Japanese yen. I think the general direction for JPY and the general direction for the dollar suggests that we will have a stronger yen to dollar,” she added.
U.S. Economic Data and Market Reactions
U.S. economic data released on Thursday was mixed, contributing to the dollar’s weakness. Retail sales increased by 0.4% in December, with upward revisions from the previous month, signaling consumer resilience. However, the number of Americans filing for unemployment benefits exceeded expectations, though it still suggested a healthy labor market. The Philadelphia Fed Business Index rose sharply to 44.3 in January, significantly surpassing expectations.
Despite these positive signals, the U.S. dollar index, which measures the greenback against a basket of foreign currencies, dropped 0.05% to 108.97.
Market Sentiment Ahead of Trump’s Return
Amo Sahota, Director at Klarity FX, observed that softer consumer price data was influencing the market, fueling expectations of potential rate cuts by the Federal Reserve this year. However, inflation concerns persist, particularly in light of incoming administration policies. The market is in a “holding pattern” ahead of Monday, when Donald Trump is set to return to the White House with economic policies that are expected to boost growth, but potentially exacerbate price pressures.
Investors are also focusing on the nomination of Scott Bessent as the new Treasury Secretary. Bessent is expected to oversee U.S. deficits and use tariffs as a negotiating tool, which could mitigate the inflationary effects of Trump’s policies.
Treasury Yields and Inflation Concerns
After Wednesday’s U.S. data, market sentiment improved, with stocks rising and benchmark 10-year Treasury yields dropping by more than 13 basis points. Federal Reserve Governor Christopher Waller suggested that the Fed might still implement three or four rate cuts this year if economic data weakens further.
Other Currency Movements
The British pound was down 0.13% at $1.2228 against the dollar, having earlier fallen sharply against the yen. The focus on monetary policy divergence, especially after last week’s selloff in British gilts, led to further pressure on the pound.
China’s yuan, which has been under pressure due to tariff risks, was trading near the weak end of its band at 7.3316.
In conclusion, the U.S. dollar faces downward pressure ahead of significant events, including Trump’s return to office and the BOJ’s policy meeting, while the yen strengthens on expectations of a rate hike. Markets remain cautious, awaiting further economic data and developments on both sides of the Pacific.
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