Dollar pauses as traders digest Fed comments; yen steady despite GDP surprise – 2024-02-14

TOKYO, Feb 15 (Reuters) – The U.S. dollar held below a
three-month high on Thursday, as market players tried to gauge
when the Federal Reserve will likely begin cutting interest
rates as Fed officials weighed in on Tuesday’s inflation data.

While under renewed pressure this week, the yen kept off the
three-month low hit against the dollar on Tuesday despite data
showing Japan’s economy slipped into a recession as it
unexpectedly shrank for two straight quarters on weak domestic
demand.

The U.S. inflation data pushed back bets on a first Fed rate
cut to the middle of the year, after showing the U.S. consumer
price index (CPI) gained 3.1% in January on a year-on-year
basis, compared with an expected 2.9% rise.

The market is currently pricing in no rate cut in March
compared to 77% bets on rate cuts starting then a month ago,
according to CME’s FedWatch tool. Markets see a 60% chance the
Fed will also hold rates at its May meeting.

“The upside surprises should serve as a reminder that the
Fed do not expect the path back to inflation to be easy,” said
Matt Simpson, senior market analyst at City Index.
Chicago Fed President Austan Goolsbee said on Wednesday the
Fed’s path toward cutting will still be on track even if price
increases run a bit hotter-than-expected over the next few
months, and the central bank should be wary of waiting too long
before it cuts interest rates.

Fed Vice Chair for Supervision Michael Barr said the Fed
remained confident, but the January CPI numbers shows the United
States’ path back to 2% inflation “may be a bumpy one.”

“The Fed are taking a long-view approach and their ‘path’
back to 2% allows for mishaps along the way. And comments from
(Fed officials) after the hot inflation report attest to this,”
City Index’s Simpson said.

The dollar index, which measures the greenback
against six peer currencies, consolidated below a fresh
three-month high of 104.97 touched on Wednesday, ahead of U.S.
retail sales in January due later on Thursday. It last sat at
104.65.

The yen was up 0.09% versus the greenback at 150.45
after Japan’s top currency officials warned against “rapid” and
speculative yen moves.

Japan intervened in the currency market more than once in
2022 when the yen plunged to 32-year lows near 152 to the
dollar.

Still, the heat from the dollar looks likely to persist as
traders shift bets to a rate cut later in the year, said
Commonwealth Bank of Australia Currency Strategist Carol Kong.

“Against this backdrop, further verbal intervention from
Japanese authorities will not weigh on USD/JPY more than
temporarily in our view,” Kong said.

Japan’s surprisingly weak performance revealed in its gross
domestic product figures on Thursday saw it lose its title as
the world’s third-largest economy, replaced by Germany.

Sterling, meanwhile, was last trading at $1.2565
ahead of preliminary GDP data on Thursday. The pound dipped
overnight after data showed UK inflation did not accelerate in
January as expected, potentially lifting some pressure off the
Bank of England to keep rates steady for longer.

The euro was mostly unchanged at $1.073.

In cryptocurrencies, bitcoin rose 0.92% to
$52,250.00, surpassing its latest 25-month high of $52,079
touched the previous day, after the total value invested in
bitcoin surpassed $1 trillion for the first time since November
2021.

(Reporting by Brigid Riley; Editing by Jamie Freed)