Dollar volatile in thin trading while Yen maintains stability

The dollar faced challenges in establishing a firm position, influenced by indications that inflation in the United States is moderating. This scenario is expected to provide leeway for the Federal Reserve to consider interest rate adjustments in the coming year.

Simultaneously, the yen stabilised near its recent five-month peak, fuelled by the anticipation that the Bank of Japan (BOJ) might soon conclude its ultra-easy monetary policy. Throughout 2022 and 2023, this policy exerted downward pressure on the Japanese currency, while other major central banks globally initiated assertive rate-hike cycles.

Currency markets witnessed minimal activity in the wake of Christmas, with Australia, New Zealand, and Hong Kong observing the Boxing Day public holiday.

Against the US dollar, the euro saw a marginal decline of 0.06 per cent, reaching $1.1019, though it remained close to the more than four-month high of $1.1040 achieved last week. Sterling remained relatively unchanged at $1.2701, and the Australian and New Zealand dollars hovered around their recent five-month peaks.

The dollar index struggled near a five-month low of 101.42, recorded last week, and was last noted at 101.65.

Recent data revealed a decline in US prices for November, marking the first such occurrence in over 3-1/2 years. This development pushed the annual inflation increase below 3 per cent, fostering expectations of a potential interest rate cut by the Federal Reserve in March next year. The announcement followed the Federal Reserve's acknowledgment, a week prior, of the possibility of rate cuts in 2024 during the year's final policy meeting, contributing to the dollar's descent.

Wells Fargo analysts noted, "The Fed has made considerable progress on inflation," acknowledging the shift from an annual core rate of around 5 per cent at the beginning of the year. However, they stressed on the ongoing work required to ensure inflation aligns with the 2 per cent target.

In Asia, the yen advanced 0.1 per cent to 142.20 per dollar, receiving additional support from comments by BOJ Governor Kazuo Ueda. Ueda indicated a potential policy shift, stating that the likelihood of achieving the central bank's inflation target was gradually rising. He affirmed that the BOJ would contemplate changing policy if prospects of sustainably achieving the 2 per cent target increased sufficiently, while specifying that a specific timing for altering the ultra-loose monetary stance had not been decided.

Analysts, including Alvin Tan, Head of Asia FX Strategy at RBC Capital Markets, noted that BOJ Governor Ueda's speech did not offer explicit policy guidance but expressed optimism about Japan potentially emerging from the low-inflation environment.

In Japan, recent data revealed an unchanged jobless rate of 2.5 per cent in November compared to the previous month, while business-to-business service inflation remained steady at 2.3 per cent last month.

In other developments, the kiwi registered a 0.1 per cent gain, reaching $0.63145, while the Aussie was last trading at $0.68065.

(With Reuters inputs)