Dollar soft ahead of US data, yen holds onto its gains after election

SINGAPORE – The US dollar nursed steep losses on Tuesday ahead of a slate of economic data that will shape the interest rate path, while the yen held on to its gains in the wake of Prime Minister Sanae Takaichi’s resounding election victory.

Sterling was steady in early Asian hours after a volatile Monday as investors weighed the crisis facing Prime Minister Keir Starmer and rising wagers of further rate cuts. It last fetched USD 1.3682 after rising 0.6% in the previous session.

The Japanese yen was at 155.85 per US dollar, holding onto its overnight gains when it firmed 0.8%. Verbal warnings from authorities on Monday had helped strengthen the yen after the currency weakened in the immediate reaction to Takaichi’s victory.

Analysts expect the yen to weaken in the long run, noting the spotlight will soon be on Takaichi’s fiscal policies. The yen is down 6% since she took charge of the LDP in October.

“With fiscal policy set to loosen further under a bolder Takaichi administration, I think dollar-yen will ultimately resume strengthening, and we continue to forecast dollar-yen to increase to 164 by year-end,” said Carol Kong, a currency strategist at Commonwealth Bank of Australia.

While the yen had retraced some of its recent losses against other currencies, on Tuesday it was back on a weakening trend against the Swiss franc and the euro.

“For a more sustained move lower, markets will want reassurance that fiscal policy will not become overly loose,” OCBC strategists said in a note.

“A firmer, more hawkish tone from the BoJ may also be needed to anchor expectations and drive a more durable decline in USD/JPY.”

The euro eased a bit to USD 1.19 after a 0.85% jump on Monday. The dollar index, which measures the US currency against six other units, was at 96.952, hovering near a one-week low.

Analysts said media reports that China has urged local banks to diversify from US Treasuries led to some dollar weakness.

DATA-HEAVY WEEK

Investor focus this week will be on the monthly reports on US employment and consumer prices that were pushed back slightly due to the recently ended three-day government shutdown.

White House economic adviser Kevin Hassett said on Monday that US job gains could be lower in the coming months due to slower labour force growth and higher productivity. Investors are trying to assess whether weakening in the labour market has tapered off.

“Markets will be squarely focused on a number of key US data releases, including payrolls tomorrow and CPI later,” said CBA’s Kong, adding that the bank sees pressure on the dollar persisting as it is forecasting below-consensus payrolls.

January’s nonfarm payrolls report, out on Wednesday, is expected to show an increase of 70,000 jobs, according to a Reuters poll.

Traders are still pricing in two rate cuts by the Federal Reserve this year, with the first one expected in June, although markets remain on tenterhooks ahead of a potential shift in US policy stance following the nomination of Kevin Warsh to succeed Jerome Powell as Fed chair.

In other currencies, the Australian dollar eased 0.2% to USD 0.7079 while the New Zealand dollar was at USD 0.6045, down 0.2%.

(Reporting by Ankur Banerjee in Singapore and Jiaxing Li in Hong Kong; Editing by Sonali Paul)