Dollar Steady as US Inflation Cools Rate Hike Worries, Yen Remains Vulnerable

The dollar held steady on Monday following the release of US inflation data for November, which showed a modest price increase and eased some concerns about aggressive Federal Reserve rate hikes in the coming year, as reported by Reuters. This development comes as the Fed shifts towards a more measured approach to interest rate increases, following last week's announcement of projected rate cuts.

Trading volumes are expected to thin out as the year-end approaches, creating a holiday-curtailed trading environment.

The Fed's pivot towards a slower pace of rate hikes, down from four projected cuts in September to just two in December, had initially sent shockwaves through markets. Treasury yields and the dollar surged, while casting a shadow over other economies, particularly emerging markets.

Friday's inflation data, using the Fed's preferred gauge, showed moderate monthly price increases, with a key measure of underlying inflation posting its smallest gain in six months. However, the annual increase in core inflation, excluding food and energy, remains significantly above the Fed's 2% target.

Despite the moderation in inflation, traders are still pricing in 44 basis points of rate cuts next year, just shy of the two 25 basis point rate cuts projected by the Fed last week. This has pushed the market expectation for the first rate cut of 2025 to June.

The dollar index, measuring the US currency against six major peers, remained stable at 107.78 on Monday, hovering near a two-year high of 108.54 touched on Friday.

The euro, meanwhile, languished near a two-year low of $1.0434, reflecting a challenging year with a 5.5% decline against the dollar.

"When optimism is rising and market multiples are expanding, it just takes a little fear to take the veneer off a market rally," observed Brian Jacobsen, chief economist at Annex Wealth Management, to Reuters. "This year has had a number of setbacks that in hindsight were just bumps in the road. At the time they felt like existential crises. Perhaps the Fed talking about two cuts in 2025 instead of four is just another one of those bumps."

The dollar's strength, coupled with the Bank of Japan's decision to hold rates steady last week and Governor Kazuo Ueda's comments suggesting a reduced likelihood of a rate hike next month, has left the yen vulnerable near levels that could trigger official intervention.

The yen weakened to 156.65 per dollar, approaching a five-month low. Authorities in Tokyo have already issued verbal warnings about the yen's slide, and analysts anticipate further pronouncements through the end of the year.

The currency has faced significant pressure from a strong dollar and a widening interest rate differential, despite the Fed's rate cuts. The yen is down more than 10% against the dollar this year and is on track for its fourth consecutive year of declines.

"The precarious element is we are now entering a period of thinner liquidity, so policymakers and market participants have to deal with the elevated risk of rapid moves that could push the yen to levels that have led to intervention in the past," noted Kyle Rodda, senior financial market analyst at Capital.com, to Reuters. "The U.S. inflation data from Friday will help Japanese authorities because fundamentally the yen's depreciation is about upside risks to inflation and rates in the United States."

In other currency developments, sterling remained relatively unchanged at $1.25715, while the Australian and New Zealand dollars stabilized after hitting two-year lows last week. Bitcoin also experienced a slight dip, trading at $94,215.