Dollar Weakens... Yen Strengthens on 'Rate Hike' Remarks

Dollar Falls Ahead of US December CPI Release

BOJ "Wage Increases to Support Consumption, Preparing for Rate Hike"

The dollar turned weak ahead of the release of the US Consumer Price Index (CPI) for December, scheduled for the morning of the 15th local time. The Japanese Yen showed a notable strength, rising 0.5% against the dollar, as the Bank of Japan (BOJ) hinted at a rate hike next week.

According to foreign media on the 15th (local time), the US December consumer prices are expected to have risen by 0.2% from the previous month. However, if an unexpected upward trend appears, the possibility of a rate cut by the Federal Reserve this year may diminish. In preparation, the dollar index, which had surpassed 111 against a major currency basket earlier this week to record a two-year high, plummeted overnight but reduced its decline to 109.17 in the Asian forex market that day.

The dollar's decline was due to US producer prices being more subdued than expected. However, analysts believe that the dollar's weakness is unlikely to become a trend. Analysts see that the market's focus is more on the impact of Trump's second term inauguration and tariff plans on the currency than on the consumer prices to be announced on Wednesday.

Carroll Kong, a currency strategist at the Reserve Bank of Australia, pointed out, "FOMC officials will be more concerned about the future outlook for inflation during Trump's second term than the current inflation figures."

On the other hand, the Japanese Yen turned strong as the BOJ hinted at a rate hike next week.

Kazuo Ueda, Governor of the Bank of Japan, said that if Japan's economy and prices continue to improve, borrowing costs will be raised. He stated that if the trend of wage increases in Japan spreads this year, supporting consumption, they are ready to further raise rates.

Following Ueda's remarks, the Yen rose about 0.5% against the dollar, reaching 157.22 Yen. The 10-year Japanese Treasury bond yield rose to 1.255%, the highest level since April 2011.

The BOJ policy meeting will be held on the 23rd and 24th. The market sees a 70% chance that the BOJ will raise rates by 25 basis points (1bp=0.01%) next week.

Ueda cited domestic wage outlook and Trump's policies as reasons for holding off on a rate hike last month, and since then, the market has been paying attention to the BOJ's view on wages and the outlook for US policies.

The BOJ's regional economic analysis report released last week showed that wage increases are spreading across companies and industries of all sizes in Japan. Analysts pointed out that the remaining challenge for a rate hike is the tariff increase plan that Trump will announce after his inauguration next Monday and the market's reaction.

UBS expects that unless there is a market shock from President Trump, the BOJ will raise rates next week and again in July and December this year.

Guest reporter Kim Jeong-ah kja@hankyung.com