Dollar struggles to gain a foothold in light trading, yen stabilizes

The dollar tried to find a bottom in light holiday trading on Tuesday amid signs that inflation in the world's largest economy is cooling, which could give the Federal Reserve room to cut interest rates next year.

Meanwhile, the yen has stabilized near recent five-month highs as the Bank of Japan (BOJ) is likely to soon end its ultra-accommodative policy, which has weighed on the yen for much of 2022 and 2023 as other major central banks around the world embark on an aggressive rate hike cycle.

The day after Christmas, currency movements were mostly calm, with markets in Australia, New Zealand, and Hong Kong still closed for the Boxing Day public holiday.

As of 09:50 Beijing time, the euro rose 0.06% to $1.1017 against the dollar, not far from the more than four-month high of $1.1040 hit last week.

The Australian dollar rose 0.06% to 0.6806 against the U.S. dollar, with the Australian and New Zealand dollars hovering near recent five-month highs.

Data released on Friday showed that the US price index fell in November for the first time in more than three-and-a-half years, pushing annual inflation further below 3 per cent and boosting market expectations for the Federal Reserve to cut interest rates in March next year.

A week ago, Federal Reserve policymakers opened the door to a rate cut in 2024 at their last policy meeting of the year, a move that depressed the dollar.

"The Fed has made considerable progress on inflation, with core inflation closer to 5 per cent at the start of the year, although the Fed's work is not yet complete in ensuring sustained progress towards its 2 per cent objective," Wells Fargo analysts said in a note.

The yen rose 0.1% to 142.20 yen against the dollar, further supported by comments from Bank of Japan Governor Kazuo Ueda, who hinted at the possibility of a policy shift.

Mr. Ueda said on Monday that the chances of meeting the central bank's inflation target were "gradually increasing" and that the central bank would consider changing policy if the prospects for sustained 2 per cent growth were "sufficient", although he said the BoJ had not yet decided on a specific timing for changing its ultra-loose monetary stance.

Alvin Tan, head of Asia FX strategy at RBC Capital Markets, said: "Bank of Japan Governor Ueda did not provide any policy guidance in his speech yesterday, despite his hope that Japan will eventually emerge from the low inflation environment."

A series of data released on Tuesday showed that Japan's unemployment rate was unchanged from the previous month at 2.5 percent in November, while business-to-business (B2B) services inflation held steady at 2.3 percent.