The dollar struggled to stabilize on Tuesday amid light trading, as indications of slowing inflation in the US suggested that the Federal Reserve may have room to lower interest rates next year. Additionally, the yen held firm near a five-month high, fueled by speculation that the Bank of Japan may soon signal the end of its ultra-loose monetary policy. This policy has kept the yen under pressure as other major central banks have raised interest rates aggressively throughout 2022 and 2023.
The post-Christmas trading day saw minimal movement in currency markets due to public holidays in several countries, including the UK, Australia, New Zealand, and Hong Kong. This resulted in subdued activity for major currencies such as the dollar and the yen, with traders awaiting further signals on their future trajectories.
The dollar index, which measures the greenback against a basket of major currencies, edged up 0.1 percent to 95.677 after hitting a 21-month low of 95.271 last week. The index has been under pressure in recent weeks as markets price in expectations of a more dovish monetary policy stance from the Federal Reserve amid signs of easing inflationary pressures.
Meanwhile, the yen held steady near the five-month high it reached earlier in the week, with market participants monitoring the possibility of the Bank of Japan making adjustments to its monetary policy. The yen’s strength has been a notable feature in currency markets, especially as central banks in other major economies have taken more aggressive steps to normalize their interest rate policies.
The euro was little changed at $1.1315, while the British pound held firm at $1.3168, both currencies showing limited movements due to the holiday-thinned trading conditions. Market participants remained cautious about taking large positions in the absence of key economic data releases or major news developments.
Elsewhere, the Australian and New Zealand dollars were also flat, with the Aussie trading at $0.7201 and the Kiwi at $0.6827. Trading volumes were light across the board, contributing to a lack of significant price movements in major currency pairs.
Looking ahead, market participants will be monitoring the release of key economic data and central bank communications for clues on the future direction of major currencies. Any developments related to inflation, interest rates, or monetary policy adjustments are likely to have a significant impact on currency markets in the coming weeks.
