The Dollar Index or it is also known as DXY strengthened in Asian trading on Monday (12/December). The cause is support of higher-than-expected United StatesProducer Inflation data.
At the time of this news, DXY was moving in the 105.16 range. It means that 0.22 percent higher on a daily basis. According to data published by the America's Bureau of Statistics, Producer Inflation last month increased by 7.4 percent on an annualized basis.
This figure did shrink from the previous period which reached 8.1%. However, it successfully outperformed the market projection that predicted a decline to 7.2%.
There is little growing concern in the market about what if US inflation continues to be high. Another question arises as to whether high inflation will prompt the Fed.
It is especially to keep policy at a potentially longer-than-expected restrictive level. That was said by Carol Kong, a currency analyst at Commonwealth Bank of Australia.
Central Bank Meeting In the Spotlight
Despite market concerns about relatively high, American producer price pressures, this week's focus is on the Federal Reserve's interest rate announcement.
The consensus of economists suggests that the Fed is likely to raise interest rates by 50 bps at its last meeting of the year. Carol gave her further overview about this one.
Carol Kong said that if Powell later alludes more to economic risks, then that could be a dovish signal from the Fed. Of course right now the market prefers dovish comments.
Market also want to see how the FOMC pays more attention to the risks of an economic downturn. The Bank of England (BoE) and the European Central Bank (ECB) will also hold meetings this week.
50 BPS Rate Hike is Expected
These meetings are expected to hike rates of 50 bps each. With the tight schedule of central bank meetings, it is certain that currency market volatility will increase throughout the week.
The ECB officials have previously said a lot that they are more concerned about underlying inflation. And if they raise the rate by 50 bps, then they follow up on some hawkish comments after the Lagarde meeting.
Elsewhere, The Japanese yen became one of the currencies that hit the greenback very hard in recent times. USD/JPY briefly squirmed up following the release of US economic data at the beginning of the week.
However, it withered again in the following days. The reason is that more and more market players believe the Japanese central bank (BoJ) will tighten its monetary policy in the next few months.
Yen Exchange was Strengthening
Market participants flocked to launch a short-selling action on Japanese bonds. The action held the Japanese government's 10Y bond yield at the top BoJ-defined limit of 0.25%.
The yen exchange rate also strengthened until it almost touched 137.00 against the US dollar in Asian session trading on Friday. BoJ policy outlines a short-term interest rate at a rate of 0.1%.
Besides that, They also control the yield of 10Y bonds in the range of 0% with an upper limit at 0.25%. BoJ Governor Haruhiko Kuroda has repeatedly emphasized the importance of maintaining this unique loose monetary policy.
The aim is to encourage a sustained increase in the inflation rate at the 2 percent rate. However, a number of recent developments have begun to challenge the market's confidence in the constancy of the BoJ.
Inflation in Tokyo Noted the Fastest Record
Inflation data in Tokyo in November 2022 showed the fastest rise in 40 years. Such developments indicate that the BoJ is getting closer to achieving its inflation target.
There has been speculation surrounding the BoJ's monetary policy change. With prices rising, speculation has intensified that the organization might change its yield curve control (policy).
That was said by Masayuki Koguchi of Mitsubishi UFJ Kokusai Asset Management. The central bank may adjust its yield curve control policy before March.
The decision could potentially be made after 'shunto'. However, Bank of Japan may also act more quickly as it was said by Ayako Fujita, a chief Japan economist at JPMorgan Securitie
