US inflation keeps the dollar stable, and the Fed is watching

11 Dec 2023 , 09:24 AM

With the Federal Reserve’s final policy meeting and a report on U.S. inflation expected to set the tone for the week, the dollar gained ground on Monday, while the yuan remained under pressure due to growing deflationary concerns in China.

As speculation intensified that the Bank of Japan’s ultra-low interest rate policy may be coming to an end, the greenback reversed part of its sharp decline versus the Japanese currency late last week, pushing back above 145 yen and last buying 145.12 yen.

Sterling hovered close to Friday’s two-week low of $1.2504, down 0.02% to $1.2545. Data released on Friday revealed that, while the unemployment rate dropped to 3.7% and U.S. job growth surged in November, the world’s largest economy’s labor market was resilient, defying predictions of an early-year interest rate cut by the Federal Reserve.

Given the statistics, traders now show a greater inclination towards May rather than March for the Fed’s potential rate-cutting timeline. As the dollar index remained stable at 103.95, the euro increased by 0.06% to $1.0767, but it remained near Friday’s three-week low of $1.07235. Last week, the index increased by more than 0.7%.

The attention now turns to the upcoming Federal Open Market Committee (FOMC) policy meeting later this week and the U.S. inflation data expected to be released prior to it. Consumer prices are anticipated to continue declining annually.

Over the weekend, data from Asia revealed that China’s factory-gate deflation increased, and consumer prices fell at the sharpest rate in three years in November, suggesting growing deflationary pressure as the country’s economic recovery is questioned due to weak domestic demand. The offshore yuan was mostly quiet in early Asia trade but hovered around a three-week low at 7.1842 per dollar.

These figures add to the mixed trade statistics and manufacturing surveys from recent times, which have sustained requests for additional policy support to support growth. The New Zealand dollar was last seen up 0.11% at $0.6128, while the Australian dollar, often considered a liquid proxy for the yuan, was little changed at $0.6577.

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