The US dollar fluctuated against other major currencies on Tuesday as investors awaited the latest inflation report that could influence the Federal Reserve’s decision on interest rate cuts.
The greenback gained slightly against the euro but slipped against the yen, reflecting the mixed expectations for the consumer price index (CPI) data due on Thursday.
The CPI is expected to show that headline inflation rose 0.2% in December and 3.2% on an annual basis, according to a Reuters poll of economists. If the data confirms that inflation is moderating, it could boost the chances of a rate cut in March, as the Fed has signaled it is ready to act if needed to support the economy.
However, if the data comes in higher than expected, it could reduce the likelihood of a rate cut and lift the dollar, as higher inflation would erode the value of other currencies.
“The market is still trying to find its feet in terms of the trajectory and timing of the first US rate cut,” said Kamal Sharma, senior G10 FX strategist at Bank of America, who expects the Fed to start cutting rates at the March meeting.
“Our base case scenario is for a soft landing, lower dollar, bull steepening and that broadly should be supportive of risk assets more generally,” Sharma added.
Bitcoin ETFs Boost Crypto Demand
In the cryptocurrency market, bitcoin fell slightly but remained near its highest level since April 2022, as investors anticipated the approval of spot bitcoin exchange-traded funds (ETFs) by the US Securities and Exchange Commission (SEC) this week.
Several investment managers disclosed the fees they plan to charge for their proposed bitcoin ETFs on Monday, indicating that they are confident of getting the green light from the regulator.
Bitcoin ETFs would allow investors to buy and sell the digital currency through a regulated platform, without having to deal with the technical and security challenges of holding it directly.
Bitcoin was last down 1.12% at $46,470, after reaching a 21-month high of $47,281 on Monday.
Japan’s Core Inflation Slows
In Asia, data on Tuesday showed that core inflation in Japan’s capital slowed for the second straight month in December, easing some pressure on the Bank of Japan to exit its ultra-loose monetary policy.
The core consumer price index for Tokyo, which excludes fresh food but includes oil products, rose 0.4% in December from a year earlier, down from 0.5% in November and below the median market forecast of 0.5%.
The data suggests that inflation remains subdued in Japan, despite the government’s efforts to boost growth and spending through fiscal stimulus and the hosting of the 2022 Winter Olympics.
The Bank of Japan has kept its policy rate at -0.1% and pledged to guide long-term interest rates around zero, as part of its massive asset purchase program to support the economy and achieve its elusive 2% inflation target.
The bank is expected to maintain its policy stance at its next meeting on January 20-21, unless there is a significant deterioration in the economic outlook.
The diverging trends in inflation and interest rates among the major economies reflect the different challenges and opportunities they face in the post-pandemic era.
While the US is grappling with the risks of overheating and stagflation, Japan is still struggling to overcome deflation and stagnation.
Meanwhile, the cryptocurrency market is offering a new way of investing and transacting, with the potential to disrupt the traditional financial system and create a more decentralized and democratic economy.
Source: Reuters
