Dollar poised for monthly rise as Fed in spotlight

31 Jan 2024 , 09:51 AM

As traders awaited the conclusion of January with the U.S. rates decision, the dollar was poised for its largest monthly gain since September and the yen for its steepest decline in over a year on Wednesday.

This month, the dollar has appreciated 2% versus a basket of key currencies as investors reduced their expectations for the pace and scope of rate reductions in response to positive U.S. economic data and resistance from central bankers.

In the meantime, weak wage growth and declining inflation in Japan subdued expectations for rate increases, causing the yen to decline more than 4% against the dollar in January—the most since February 2023.

Early in the Asia day, the dollar remained stable at $1.0844 per euro and slightly weaker at 147.23 yen. The yen was supported by a summary indicating that the Bank of Japan’s January meeting discussed terminating negative interest rates.

The dollar index last traded at 106.8. With sterling at $1.2698.

The Federal Reserve is set to keep interest rates in the United States unchanged later on, but it is raising red flags by removing language suggesting it may consider more hikes.

From 73% at the beginning of the year, interest rate futures now price in a roughly 43% likelihood of a Fed rate drop in March.

European inflation data is anticipated before the Fed. Australian inflation slightly beat analyst estimates, supporting expectations the central bank is done raising rates.

Australian dollars fell 0.2% to $0.6588. At $0.6133, the New Zealand dollar remained stable. [AUD]

This month, the bond market has experienced a robust rebound due to expectations of interest rate reduction in China, while the yuan has been negatively impacted by flight from the country’s collapsing equity markets.

The Chinese yuan closed at 7.1771, down 1% for the month, on Wednesday. Based on an official survey, China’s manufacturing activity shrank in January for the fourth consecutive month, indicating that the industry was having trouble gaining traction.

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