US Dollar near eight month low

The dollar lolled near an eight-month low against its peers on Thursday, as a gloomy US corporate earnings season stoked recession fears and as traders stayed on guard ahead of a slew of central bank meetings next week.

The US dollar index, which measures the greenback against a basket of currencies, last stood at 101.53, languishing near last week's eight-month trough of 101.51.

Trading was thin on Thursday, with Australia out for a holiday and some parts of Asia still away for the Lunar New Year.

Downbeat earnings and guidance from US corporates and a string of tech sector layoffs have deepened fears of an economic downturn in the United States, leading investors to pare back expectations on how much longer the Federal Reserve will need to aggressively raise interest rates.

"There are now signs the US economy may be slowing in a more meaningful manner," said economists at Wells Fargo.

"With the Fed no longer leading the charge on interest rate hikes and US economic trends set to worsen, we now believe the US dollar has entered a period of cyclical depreciation against most foreign currencies."

The Fed's policy-setting committee will begin a two-day meeting next week, and markets have priced in a 25-basis-point interest rate hike, a step down from the central bank's 50 bp and 75 bp increases seen last year.

Markets expect policymakers at the Bank of England and European Central Bank (ECB), who will also meet next week, to deliver 50 bp rate hikes. The ECB is seen most likely to remain hawkish.

Sterling was last 0.12% higher at US$1.2415, while the euro rose 0.05% to US$1.0920, flirting with its nine-month high of US$1.0927 hit on Monday.

"The euro does draw a lot of attention," said Jarrod Kerr, chief economist at Kiwibank. The euro zone "had a favourable winter .... The energy crisis that people were expecting hasn't quite played out yet."

Elsewhere, the Canadian dollar last traded at 1.3393 per dollar, after the Bank of Canada on Wednesday raised its key interest rate to 4.5% but became the first major central bank fighting global inflation to say it would likely hold off on further increases for now.

The Aussie edged 0.06% higher to US$0.7107, after jumping 0.8% on Wednesday following shock data showing Australian inflation had surged to a 33-year high last quarter, bolstering the case for the Reserve Bank of Australia to raise interest rates again next month.

The kiwi steadied at US$0.6480, having slumped 0.43% in the previous session after New Zealand's fourth-quarter annual inflation came in below its central bank's forecast.

In Asia, the Japanese yen rose 0.3% to 129.21 per dollar.

Bank of Japan (BOJ) policymakers debated the inflation outlook at their January meeting, with some warning that it could take time for wages to rise sustainably, a summary of opinions at their meeting showed on Thursday.

At that meeting, the BOJ kept ultra-low interest rates unchanged but beefed up a monetary policy tool to prevent the 10-year bond yield from breaching its new 0.5% cap. Its decision defied market expectations of further tweaks to monetary policy.

 

BOJ Kuroda dismisses near term chance of exiting easy policy

Haruhiko Kuroda, Governor, Bank of Japan (BOJ) on Monday brushed aside the chance of a near-term exit from ultra-loose monetary policy but voiced hope that intensifying labour shortages will prod firms to raise wages.

Kuroda said the BOJ's decision last week to widen the allowance band around its yield target was aimed at enhancing the effect of its ultra-easy policy, rather than a first step toward withdrawing its massive stimulus program.

"This is definitely not a step toward an exit. The Bank will aim to achieve the price target in a sustainable and stable manner, accompanied by wage increases, by continuing with monetary easing under yield curve control," Kuroda said in a speech delivered to a meeting of business lobby Keidanren.

He also said Japan's average consumer inflation will likely slow below the BOJ's 2% target in the next fiscal year as the effects of soaring import costs dissipate.

But Kuroda said wage growth will likely increase gradually due to intensifying labour shortages and structural changes in Japan's job market, which are leading to higher pay for temporary workers and a rise in the number of permanent workers.

"Labour market conditions in Japan are projected to tighten further, and firms' price- and wage-setting behaviour is also likely to change," Kuroda said.

"In this sense, Japan is approaching a critical juncture in breaking out of a prolonged period of low inflation and low growth," he said.

The strength of wage growth is seen as key to how soon the BOJ could raise its yield curve control (YCC) targets, which are set at -0.1% for short-term interest rates and around 0% for the 10-year bond yield.

The BOJ shocked markets last week with a surprise widening of the band around its 10-year yield target. Kuroda had described the move, which allows long-term rates to rise more, as aimed at easing some of the costs of prolonged stimulus rather than a prelude to a full-fledged policy normalization.

With inflation exceeding its 2% target, however, markets are rife with speculation that the BOJ will raise the yield targets when the dovish governor Kuroda's term ends in April next year.

While more companies are starting to hike prices to pass on higher costs to households, the BOJ must examine whether such changes in corporate price-setting behaviour will take hold as a new norm in Japan, Kuroda said.

The outcome of next year's spring wage negotiations between big companies and unions will also be key to the outlook for wage growth, he said.

Speaking at the same meeting, Prime Minister Fumio Kishida called for business leaders' help in achieving wage growth high enough to compensate households for the rising cost of living.

Japan's core consumer inflation hit a fresh four-decade high of 3.7% in November this year as companies continued to pass on rising costs to households, a sign that price hikes were broadening.

But wages have barely risen for permanent workers, as companies remained cautious about increasing fixed costs amid an uncertain economic outlook.