USD pauses as US CPI stabilizes... Yen hits lowest in 1.5 years amid political risks

Source: BlockMedia Original Title: [Forex] US CPI Stabilizes Dollar Pauses… Yen, Political Risks, Falls for the First Time in 1.5 Years Original Link: On the 13th(local time), the US December Consumer Price Index(CPI) was in line with market expectations, causing the dollar index(DXY) to surge intraday before retreating some of its gains. Meanwhile, concerns over Japan’s potential increase in fiscal spending pushed the yen to its lowest level against the dollar in 1.5 years.

According to TradingView, the dollar index rose 0.24% from the previous day to 98.786. After a sharp drop and rebound immediately following the CPI release, temporary volatility was observed, but the index recovered and resumed its upward trend, reflecting the Fed’s potential for further rate cuts.

According to the U.S. Department of Labor, December CPI increased 0.3% month-over-month and 2.7% year-over-year, matching market expectations. Core CPI rose 0.2% month-over-month and 2.6% year-over-year, below the expected 2.7%.

These figures suggest an increased likelihood that the Fed will keep interest rates unchanged for the time being, while also leaving open the possibility of rate cuts in the second half of the year. As a result, the dollar, which had shown early strength, was pressured after the CPI announcement by some profit-taking sales, reducing its gains.

Eric Tioré, FX strategist at Scotiabank, explained, “Market participants seem to have built positions in anticipation of a potential surge in inflation, but with the results in line with expectations, positions were unwound, limiting the dollar’s rise.”

Meanwhile, the yen weakened sharply due to political and fiscal risks. Local reports suggest that Japanese Prime Minister Fumio Kishida may push for early elections in February, leading markets to expect an expansionary fiscal policy.

Against the US dollar, the yen fell to 158.95 yen, its lowest since July 2024. Katsuyama Satsuki, Japan’s Finance Minister, expressed concerns about the yen’s unilateral weakness during a meeting with the US Treasury Secretary, hinting at possible intervention in the foreign exchange market.

Eric Tioré commented, “Prime Minister Kishida is showing an accommodative stance on both fiscal and monetary policies, reflecting market expectations of Japan’s medium- to long-term inflation. This could lead to structural weakness in the yen,” he said.

Debates over the Fed’s policy independence are also expected to be a key factor influencing the dollar’s medium-term direction. Jerome Powell, Chair of the Federal Reserve(Fed), recently announced that he has been notified of potential criminal charges by the Department of Justice, raising concerns about policy intervention and increasing market vigilance.

Alberto Musalem, President of the St. Louis Fed, stated, “The US economy remains resilient, and easing policies are premature,” which somewhat eased market expectations of rate cuts. However, the upcoming announcement of the next Fed Chair nomination and ongoing policy uncertainty remain potential risks.

Market participants are closely watching the Federal Open Market Committee(FOMC) meeting scheduled for the 27th-28th, with current futures markets reflecting a 96% probability of no rate change.