USD: Dollar steadies ahead of Trump inauguration

NEW YORK/GDANSK: The US Dollar (USD) strengthened against the yen on Friday, but remained on track to end the week lower after a six-week winning streak, as investors await Donald Trump’s presidential inauguration and clarity on the course of the incoming administration’s policies.

The yen was poised for its strongest weekly performance in over a month as expectations for a Bank of Japan rate hike next week grow, putting the dollar on the back foot.

It climbed more than 1% against the dollar this week, reversing last week’s decline, and touched a one-month high of 154.98 per dollar earlier on Friday.

The greenback was last up 0.52% against the yen at 155.915.

“The market has a Bank of Japan 25-basis-point hike nearly fully discounted,” said Marc Chandler, chief market strategist at Bannockburn Global Forex in New York.

“What could go wrong with that is if the inauguration and Trump’s first couple of days could roil the market, then the BOJ would probably hold off raising interest rates and that would be negative for the yen.”

Remarks from BOJ officials along with Japanese data that point to persistent price pressure and strong wage growth have helped boost market confidence that a rate shift is in the offing, with traders pricing in an 80% chance of a hike next week.

Sources also told Reuters that the central bank is likely to hike rates next week barring any market shocks when Trump takes office.

The dollar has surged in the past few weeks on the back of rising Treasury yields, reflecting expectations that President-elect Trump’s policies could boost inflation when the U.S. economy is already strong.

But bond markets got relief from a relentless sell-off after softer U.S. core inflation data on Wednesday, plus remarks from Federal Reserve Governor Christopher Waller on Thursday, who said three or four interest rate cuts were still possible this year if the data supported that.

This led markets to up their bets on Fed cuts this year, putting some pressure on the dollar ahead of Trump’s return to the White House next week.

Money markets currently price in about 40 basis points in U.S. rate cuts in 2025.

“Obviously, Trump Inauguration Day and the rumored to be 100 executive orders that are potentially going to be coming about, that’s kind of keeping everybody on the edge of their seat, waiting to see how all that plays out,” said Brad Bechtel, global head of FX at Jefferies in New York.

“Everything’s kind of settling into a little bit of a range until we get into more around what Trump actually does.”

Investors are now awaiting Trump’s inauguration speech on Monday to get a better sense of his policy steps, with a volatile period for markets expected ahead.

Sterling was down 0.4% at $1.2196, not far from the 14-month low it hit on Monday.
British retail sales fell unexpectedly in December, according to data on Friday that raised the risk of an economic contraction in the fourth quarter.

The euro remained flat at $1.0305.

That left the dollar index , which measures the U.S. currency against six other units, up 0.1% at 109.06, away from a more than two-year high touched at the start of the week.

The index is set for a drop of about 0.5% in the week, which would snap a six-week run of gains.

China’s yuan was little changed at 7.3254 per dollar after data showed the world’s second biggest economy grew 5.4% in the fourth quarter, significantly beating analysts’ expectations and putting full-year 2024 growth at 5%, bang in the centre of Beijing’s target.

The Chinese currency is seen on the front lines of tariff risk from a Trump presidency. Chinese President Xi Jinping held phone talks with Trump, state media Xinhua reported on Friday.

“Who knows what was discussed, but potentially Trump basically warning them that something’s coming. We’ll see. But I think the market is waiting for that,” said Bechtel.

Bitcoin was last up 3.63% at $103,842 on Friday, amid hopes in the crypto industry that the incoming Trump administration will mark a shift in cryptocurrency policies.