©Reuters. FILE PHOTO: U.S. dollar banknotes are seen in this illustration taken March 10, 2023. REUTERS/Dado Ruvic/Illustration/File Photo
By Brigid Riley
TOKYO (Reuters) – The U.S. dollar held below a three-month high on Thursday as market participants tried to gauge when the Federal Reserve is likely to start cutting interest rates as Fed officials assessed data on Tuesday’s inflation.
Although under renewed pressure this week, the yen held off a three-month low against the dollar on Tuesday, despite data showing the Japanese economy slipped into recession as it unexpectedly contracted for two consecutive quarters due to weak internal demand.
US inflation data deferred bets on a first rate cut by the Fed in mid-year, after showing the consumer price index gained 3.1% in January on a year-on-year basis, compared with an expected increase of 2.9%.
According to CME’s FedWatch tool, the market is currently not pricing in any rate cuts in March, compared to 77% who bet a month ago that cuts would begin then. Markets see a 60% chance that the Fed will also maintain rates at its May meeting.
Chicago Fed President Austan Goolsbee said Wednesday that the Fed’s path will still be on track, even if price increases are a bit stronger than expected in the coming months, and the central bank should be cautious in ‘wait too long before cutting interest rates.
Fed Vice President for Supervision Michael Barr said the Fed remains confident, but January CPI data shows the U.S. path to 2% inflation “could be bumpy.”
“The Fed is taking a long-term approach and its ‘path’ back to 2% leaves room for setbacks along the way. And Fed officials’ comments after the hot inflation report attest to that,” Matt said Simpson, senior market analyst. to the city index.
The, which measures the greenback against six currencies, consolidated below a new three-month high of 104.97 hit on Wednesday, ahead of U.S. January retail sales due later on Thursday. It last sat at 104.69.
The yen strengthened 0.23% against the greenback at 150.26, continuing to hold steady after Japan’s top currency officials warned of “rapid” moves in the yen the previous day and despite unexpected data Japan’s weak gross domestic product on Thursday.
The slide saw Japan lose its title as the world’s third largest economy, replaced by Germany.
Carol Kong, currency strategist at the Commonwealth Bank of Australia (OTC): found the technical recession to have limited impact on the dollar/yen exchange rate, with the upcoming spring wage negotiations more important both for the Bank of Japan’s (BOJ) policy outlook than for the yen.
“Indeed, markets continued to price in a high probability of a BOJ rate hike in April, despite the negative GDP reading,” Kong said.
However, the heat from the dollar is likely to persist as traders bet on a Fed rate cut later in the year, he said.
“In this context, in our opinion, further verbal interventions by the Japanese authorities will not matter except temporarily.”
Elsewhere in the region, the dollar slipped after a surprisingly weak set of employment data, falling 0.15% to $0.648.
The stock fell 0.06% against the greenback to $0.60825.
The pound, meanwhile, last traded at $1.2558, ahead of Thursday’s British GDP data.
The euro remained essentially unchanged at $1.0727.
In cryptocurrencies, bitcoin rose 0.67% to $52,120.55. It rose as high as $52,544.51 early in the session, surpassing a 25-month high of $52,079 hit on Wednesday, after the total value invested in bitcoin surpassed $1 trillion for the first time since November 2021.