TOKYO, Sept 12 (Askume) – The dollar inched close to a four-week high against the euro on Thursday after signs of stabilising U.S. inflation raised expectations the Federal Reserve would refrain from a big interest rate cut next week.
Meanwhile, the European Central Bank (ECB) is widely expected to cut interest rates by 25 basis points on Thursday , with investors eager to hear indications of how soon the monetary authority will cut rates again.
The US dollar strengthened against the yen on Wednesday, with the US dollar falling as much as 1.24% to its lowest level this year, but regaining all losses after the release of consumer price data.
On Wednesday morning, Bank of Japan board member Junko Nakagawa reiterated the central bank’s dovish stance, saying there was still room for further interest rate hikes due to low real interest rates. Another BOJ board member, Naoki Tamura, took office on Thursday.
Last month, the US Consumer Price Index (CPI) rose 0.2% , the same increase as July. But excluding the volatile food and energy components, the index rose 0.3%, more than the 0.2% gain in the previous month.
As a result, traders have underestimated the probability of a 50 basis point (bp) rate cut on September 18, with a 15% probability of a 25 bp rate cut, while the real interest rate is 85%. However, a 104 basis point cut is still possible by the end of the year, meaning the market is still pricing in a 50 basis point cut at the November or December meeting.
USD/JPY was up 0.38% at 142.905 yen by 0031 GMT, having fallen to 140.71 yen on Wednesday for the first time since Dec. 28 following Nakagawa’s comments.
However, IG analyst Tony Sycamore said the yen’s failure to hold on to gains “suggests the yen will fall to lows of 140.71, … opening up a path back to 145.50”.
The dollar-yen exchange rate followed the trend of long-term U.S. Treasury bond yields, which rebounded strongly after falling to a 15-month low of 3.605% on Wednesday, rising to 3.6609% on Thursday as of Asia time.
The euro fell to $1.1007, close to Wednesday’s low of $1.1002, its lowest since Aug. 16.
The European Central Bank cut its deposit rate to 3.75% in June and many policymakers have favoured another cut, suggesting their debate at the upcoming meeting is likely to focus on how quickly borrowing costs should come down.
Sterling fell to $1.30360 for the first time since Aug. 20, after falling to $1.30025 in the previous session.
The Swiss franc also lagged, with USD/CHF rising 0.08% to CHF0.8529, having hit CHF0.8544 on Wednesday, its highest level since Aug. 21.
