Greenback softens, sterling squeezed as focus turns to US inflation
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THE US dollar dipped on Thursday (Dec 21) while sterling crosses were nursing losses in holiday-thinned trade ahead of the last major data release of the year in Friday’s US inflation figures.
Sterling suffered its sharpest drop on the US dollar in two months on Wednesday after British inflation dived below forecasts to an annual 3.9 per cent in October, a two-year low.
The currency fell 0.7 per cent to US$1.2638 as traders priced in Bank of England rate cuts as soon as May. On Thursday, it hit a one-week low of US$1.2613, before recovering slightly as the US dollar softened. It was last at US$1.2669.
Against the euro, the pound hit its weakest in more than three weeks at 86.78 pence, while it was also lower against the Aussie and yen.
Analysts are forecasting a similar easing for Friday’s US core personal consumption expenditure data, with the annual inflation rate seen slowing to its lowest since 2021 at 3.3 per cent.
The US dollar index, which measures the currency against six others including the pound, was down 0.4 per cent at 102.01.
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“Broadly speaking, the market is happy to run with this Goldilocks-type soft landing scenario, which tends to lead to the (US) dollar softening,” said Dominic Bunning, head of European FX research at HSBC.
“Even if we don’t necessarily buy into that in the medium term, in the short term it’s hard to fight it.”
Some analysts said month-end rebalancing in thin trade was also driving the US dollar lower.
“US equity market outperformance through December rather suggests that passive hedge rebalancing flows will run against the USD through month end,” said Shaun Osborne, chief FX strategist at Scotiabank.
“While markets look relatively calm and trade flows appear to be thinning out, there may still be motivation to push spot rates around after all.”
Heavy selling in the final hour of equities trade on Wall Street on Wednesday had also sent a ripple of risk-aversion through markets, even as stock futures steadied.
The mood helped the safe-haven yen, along with Japan lifting its growth projection for the fiscal year to 1.6 per cent.
The yen rose about 0.6 per cent and last traded at 142.725 per US dollar.
It has still lost more than 8 per cent on the US dollar this year as the Bank of Japan (BOJ) has steadfastly kept short-term rates negative, against 300 basis points of US interest rate hikes.
Analysts at Goldman Sachs said that markets should take note of the BOJ retaining its easing bias at the last meeting.
“Market pricing for action early next year is still too aggressive, especially when considering how widespread the disinflation narrative has become,” Goldman Sachs analysts said in a note.
“This is just one of the reasons why we think there is still limited scope for substantial yen appreciation.”
The euro was up 0.4 per cent at US$1.0986.
The Australian and New Zealand dollars traded just below Wednesday’s five-month highs. The Aussie was last at US$0.6759, having touched its highest since July at US$0.6779 a day earlier. The kiwi traded at US$0.6262.
China’s yuan was steady as offshore yuan funding costs fell and China’s blue-chip stock index hovered near five-year lows. It was last at 7.14 to the US dollar.
Bitcoin leapt back above US$44,000 and was up at US$44,171, just below last week’s 20-month high of US$44,729. REUTERS
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