Dollar edges higher for now; more weakness likely

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By Peter Nurse

AiVIF.com - The U.S. dollar edged off its recent seven-month low Tuesday, while the Japanese yen slipped lower ahead of a widely-anticipated Bank of Japan meeting.

At 03:20 ET (08:20 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, rose 0.1% to 102.005, bouncing from a seven-month low of 101.77 seen on Monday. 

The dollar has seen some support early Tuesday, but the conviction call within the market now appears to be that the greenback has peaked with the U.S. Federal Reserve nearing the end of its rate-hike cycle as inflation heads lower.

Morgan Stanley, for example, has cut its 2023 year-end forecast for the dollar index to 98 from 104.

"Global growth is showing signs of buoyancy, macro and inflation uncertainty are waning and the USD is rapidly losing its carry advantage," analysts at the investment bank said, in a note.

The U.S. data calendar is relatively light this week, but retail sales, industrial production and existing home sales should all fall on the soft side. 

“In theory, then, this should not impact too much the market expectations of two 25bp Federal Reserve hikes in February and March, both of which are expected to be reversed by year-end,” said analysts at ING, in a note.

This change in sentiment can be seen in USD/JPY, with the pair just above a seven-month low, although the yen has handed back some gains in the session, with the pair up slightly at 128.56.

Traders are firmly focused on the Bank of Japan’s policy-setting meeting later in the week, with expectations growing that the central bank officials will announce a change or end to Japan's yield curve control policy.

“Further adjustments to its JGB targets are in focus and investors are positioning for this with higher longer-dated swap rates. We suspect USD/JPY can trade down to 126.50 before Wednesday,” ING added.

Elsewhere, EUR/USD rose 0.1% to 1.0832, just off the previous session’s nine-month high of 1.0874, while GBP/USD rose 0.2% to 1.2217 after the U.K. labor market stayed stronger than expected in December.

The U.K. claimant count rose by 19,700, rather than the 19,800 expected by economists, while November's data were revised down to show an increase of only 16,100, rather than the 30,500 initially reported.

At the same time, wage growth in November, the last month for which data are available, grew more strongly than expected, rising 6.4% on the year, suggesting the Bank of England will have to keep tightening in its attempt to rein in inflation.

USD/CNY rose 0.5% to 6.7660, with the yuan coming off a near five-month high after data showed that the Chinese economy grew at a substantially slower pace in 2022 than the prior year, rising 3.0%, far below the official target of around 5.5%.