Dollar slips as inflation in focus, Ueda nominated as BOJ governor

The dollar was broadly lower on Tuesday ahead of a keenly anticipated inflation report, while the yen strengthened as surprise pick Kazuo Ueda was nominated to be the next governor of Bank of Japan.

Illustration shows U.S. Dollar and Euro banknotes — U.S. Dollar and Euro banknotes are seen in this illustration taken July 17, 2022. Reuters

The dollar was broadly lower on Tuesday ahead of a keenly anticipated inflation report, while the yen strengthened as surprise pick Kazuo Ueda was nominated to be the next governor of Bank of Japan.

Markets are looking to the U.S. consumer price index (CPI) data for further clues on Federal Reserve's policy outlook, with the headline number expected to rise 0.5% in January, according to a Reuters poll, after falling 0.1% in December.

The dollar index, which measures the U.S. currency against six major rivals, eased 0.107% to 103.09, having slipped 0.34% overnight.

The index is up 1% for the month of February but is far off the 20-year peak of 114.78 it touched in September when the Fed was in the midst of its jumbo rate hikes.

Since then the Fed has tempered its pace of rate hikes. The U.S. central bank earlier this month raised interest rates by 25 basis points but said that it was turning the corner in its fight against inflation.

Moh Siong Sim, a currency strategist at Bank of Singapore, said the foreign exchange market on Tuesday was in a holding pattern as the focus moves to the CPI data.

The debate right now is whether inflation will be stuck at 3 to 4% or move lower to 2% in line with the market's earlier hopes, Sim said.

"The odds are shifting to a more reasonable assessment that we might possibly get stuck at 3-4% and the Fed will have to do more."

The market is pricing U.S. interest rates to peak at around 5.2% in July and ending the year at 4.9%, moving away from earlier expectations for the start deeper rate cuts later this year.

With Fed Chair Jerome Powell reiterating that disinflation was underway last week, investors will parse through Tuesday's report to gauge the direction of prices.

Kristina Clifton, a senior economist at Commonwealth Bank of Australia, said there are tentative signs of U.S. inflation cooling but said services inflation, which is strongly linked to wages growth, has shown no signs of softening.

"While the labour market remains tight and wages growth very strong, there is the risk that we receive upside surprises on the underlying inflation figures," she said.

The euro was up 0.14% at $1.0735, having risen 0.435% the previous session. Sterling <GBP= D3> was last trading at $1.2147, up 0.10% on the day, after rising 0.68%.

The Australian dollar added 0.10% to $0.697, while the kiwi fell 0.06% to $0.635.

NEW BOJ GOV

Japan's government named academic Kazuo Ueda as its pick to become the next central bank governor, with investors betting that the surprise choice could preclude an end to the unpopular yield control policy.

Ueda, a former BOJ policy board member and an academic at Kyoritsu Women's University, is considered an expert on monetary policy but had not even been seen as a dark horse candidate for the top job.

National Australia Bank's currency strategist Rodrigo Catril said Ueda is regarded as a sensible choice as he is not a fully committed "uber dove" and he should have more flexibility as an outsider.

The Japanese yen strengthened 0.46% to 131.82 per dollar on Tuesday, having slipped 0.7% in the previous session.

The yen dropped sharply last year to a 32-year low of 151.94 per dollar as U.S. rates rose and Japanese rates stayed near zero, but it has since recouped those losses as the Fed looks to pause its tightening while speculation increase that the BOJ will move away from its ultra-loose policy.

Data on Tuesday showed Japan's economy averted recession but rebounded much less than expected in October-December as business investment slumped, meaning an exit from stimulus will prove a challenge for the BOJ.

"We believe that the modest recovery will continue this year, but today's data support the Bank of Japan's argument that the recovery is still fragile and that easy monetary policy is needed," ING economists said in a note.

"The incoming new governor will find it difficult to start any normalization."

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Currency bid prices at 0505 GMT

Description RIC Last U.S. Close Pct Change YTD Pct High Bid Low Bid

Previous Change

Session

Euro/Dollar $1.0739 $1.0725 +0.12% +0.21% +1.0741 +1.0725

Dollar/Yen 131.8050 132.4250 -0.28% +0.63% +132.3550 +132.0100

Euro/Yen 141.54 141.98 -0.31% +0.88% +142.0500 +141.5700

Dollar/Swiss 0.9178 0.9197 -0.16% -0.70% +0.9195 +0.9180

Sterling/Dollar 1.2150 1.2141 +0.05% +0.45% +1.2151 +1.2137

Dollar/Canadian 1.3333 1.3333 +0.00% -1.60% +1.3353 +1.3330