Dollar rebounds vs yen; euro firmer after inflation data

NEW YORK – The dollar regained ground against the yen on Tuesday, recovering from Monday’s selloff, even as expectations for a December rate hike by the Bank of Japan lingered, while the euro edged up after data showed euro zone inflation was slightly hotter than expected.

The US currency came under pressure late in the session after US President Donald Trump said a potential Federal Reserve chair was present as he introduced White House economic adviser Kevin Hassett at a White House meeting.

Earlier in the day, Trump said he would be announcing his choice to succeed Jerome Powell as head of the Federal Reserve early next year.

Hassett would be viewed by many investors as a dovish pick to replace Powell, and as such his nomination could weigh on the dollar.

The greenback was 0.2% higher against the yen at 155.845, after hitting a two-week low on Monday, following a sale of 10-year Japanese government bonds that drew the strongest demand since September.

“We’re basically back to where we started before (Bank of Japan Governor Kazuo) Ueda’s remarks yesterday, which is maybe a bit perplexing considering that swaps still price about an 80% chance of a Dec hike,” said Michael Brown, senior research strategist at Pepperstone.

Stocks, bonds, cryptocurrencies, and the dollar all tumbled on Monday after Ueda said the Japanese central bank would consider the “pros and cons” of raising interest rates at its next policy meeting, sending Japanese two-year yields above 1% for the first time since 2008 and prompting a spillover into global bond markets.

“To me, it speaks to everything still being very much USD-driven, with the pressure on the buck seen yesterday amid increasing expectations that Hassett will get the Fed Chair gig having given way to slightly more rational conditions today, as participants refocus on what remains a solid US growth outlook, even with a 25-basis-point Fed cut next week very much on the cards,” Brown said.

“It still seems that, in the absence of an obvious narrative, the greenback goes back to being the ‘cleanest dirty shirt’ and finds some healthy demand,” he said.

Data on Monday showed weaker-than-expected manufacturing in the US, heaping pressure on the Federal Reserve to cut interest rates this month.

Fed funds futures are pricing an 87% probability of a 25-basis-point cut at the Fed’s next meeting on December 10, compared with a 63% chance a month ago, according to the CME Group’s FedWatch tool.

INFLATION WATCH

The euro was 0.1% higher at USD 1.1624 after data showed inflation in the 20 nations sharing the euro accelerated to 2.2% last month from 2.1% in October, a small rise that is unlikely to be too concerning for the European Central Bank.

Inflation in the euro zone is practically at the ECB’s 2% target, ECB policymaker Joachim Nagel said in an interview published on Tuesday.

“This (inflation data) comes at a time where some had claimed we could yet see another cut from the ECB, although the likelihood is that their easing cycle is over,” said Joshua Mahony, chief market analyst at Scope Markets.

Sterling was about flat on the day at USD 1.3211, having touched its highest level in a month on Monday.

The Bank of England cut the amount of capital it estimates lenders need to hold, in a bid to boost lending and stimulate the economy. It was the first reduction to bank capital requirements since the financial crisis.

Leading cryptocurrency Bitcoin rose 7% to USD 92,321, pulling away from the 10-day low touched in the previous session.

(Reporting by Saqib Iqbal Ahmed in New York and Joice Alves in London; Additional reporting by Gregor Stuart Hunter in Singapore; Editing by Andrea Ricci, Nick Zieminski, and Edmund Klamann)