NEW YORK, Jan 3 (Reuters) – The greenback jumped on Tuesday before the Federal Reserve on Wednesday released minutes from its December meeting, while the euro was dented by moderating inflation data.
The US central bank slowed its pace of interest rate hikes to 50 basis points last month after delivering four consecutive 75-basis point hikes but stressed the need to hold rates in restrictive territory to bring down inflation.
Investors will watch for signs of how concerned the Fed is about persistent inflation and its thoughts on the labor market, although the meeting minutes may not be as market moving as upcoming jobs and inflation data, said Bipan Rai, North American head of FX strategy at CIBC Capital Markets in Toronto.
A still robust employment picture is seen as giving the Fed more room to keep raising rates as it battles to bring down stubbornly high inflation. The highly anticipated December jobs report is due on Friday, and consumer price data for last month will be released on Jan. 12.
Fed funds futures traders are pricing for rate cuts this year even as the Fed maintains a hawkish tone, with the fed funds rate expected to peak at 4.98% in June, before falling back to 4.57% by year-end.
The dollar was last up 0.82% against a basket of currencies at 104.49, although Rai cautioned about reading too much into the move with relatively thin liquidity as investors returned from holidays.
Data on Tuesday showed that US construction spending unexpectedly rebounded in November, lifted by gains in nonresidential structures, but single-family homebuilding continued to be hammered by higher mortgage rates.
The greenback may have gotten a boost from safety buying after data earlier showed that China’s factory activity shrank at a sharper pace in December as surging COVID-19 infections disrupted production and weighed on demand.
The Australian and New Zealand dollars, which are sensitive to Chinese growth, were both last down around 0.90%.
The euro also fell 0.92% to $1.0567 after German state inflation data showed that price pressures eased in December, indicating national inflation may also have slowed for a second month due in part to the government’s one-off payment of household energy bills.
Scotiabank noted that January is typically a strong month for the US currency.
“The strong start to the new calendar year for the USD is very much in keeping with long- (and shorter-) term seasonal trends which typically see the USD rally in January — its strongest month of the year over the past 25 years or so Shaun Osborne, chief FX strategist at Scotiabank, said in a report.
He added that recent weakness in the greenback was also likely overdone for the short-term.
Meanwhile, the yen was down slightly on the day at 130.77 after earlier hitting a six-month high of 129.51 against the US currency.
The rally followed a Nikkei report on Saturday that the Bank of Japan was considering raising its inflation forecasts in January to show price growth close to its 2% target in fiscal 2023 and 2024.
Speculation that the BOJ was set to start shifting from its ultra-loose policy flared in December when the central bank widened the yield cap range on 10-year Japanese government bonds.
Currency bid prices at 3:00PM (2000 GMT)
Reporting by Karen Brettell; Additional reporting by Samuel Indyk in London; Editing by Lisa Shumaker
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