Dollar Steady Amid Inflation Debate & Japan Rate Hike | December 22, 2023

The U.S. dollar closed flat on Friday, as a lack of significant catalysts left investors continuing to weigh recent inflation data. The Bank of Japan’s (BoJ) interest rate hike also remained a key topic of discussion.

The dollar briefly touched $908 midday, threatening to reach a new low since October 2024, but late-day buying activity left the dollar-peso trading at $912.1 on Bloomberg screens. This represents no change from Thursday and is just $2.4 above Friday’s closing price. The currency had previously experienced a sharp decline, driven by the lower-than-expected U.S. CPI reading for November and insights from the Central Bank’s Monetary Policy Report.

“The dollar’s decline in Chile was primarily due to a rebound in copper prices, weekly closing flows, and an external environment that remains relatively favorable for commodity-linked currencies, despite the dollar’s strength internationally. Looking ahead to next week, attention will remain focused on copper’s performance and further year-end positioning adjustments,” said Felipe Sepúlveda, Chief Analyst at Admirals Latinoamérica.

Mixed Signals and Uncertainties

Emerging market currencies generally strengthened, while copper prices in London rose 0.9% to US$5.39 per pound, nearing last week’s historic high of US$5.42. Copper’s performance is a key indicator of global economic health, often reflecting demand from major economies like China.

The dollar index gained 0.2%, largely due to the significant depreciation of the Japanese yen (-1.2%). The BoJ raised interest rates to a three-decade high, a move initially expected to support the yen. However, the market had largely priced in the decision and was seeking clearer guidance on future rate hikes, which the BoJ and its governor did not provide.

While the consumer price index data confirmed expectations that the Federal Reserve (Fed) would likely continue to lower interest rates, it also introduced some uncertainty. On Friday, John Williams, President of the Federal Reserve Bank of New York, told CNBC that “technical factors” had distorted the reading and skewed it downward.

“Normally, a surprise of this magnitude would trigger a substantial market reaction. However, given the known quality issues stemming from the recent government shutdown and likely Black Friday discounts during the survey period, operators appear to have dismissed the report as meaningless. In fact, the dollar index closed unchanged that day,” noted Monex.

The recovery in risk appetite, which had been dampened earlier in the week, continued during the session, as reflected in stock market indices. Investors were also preparing for a large expiration of derivative instruments.