U.S. dollar tumbles after weak data; yen flat as BOJ impact fades

Wednesday’s economic reports reinforced expectations that the Fed will continue to reduce its tightening pace in upcoming meetings.

The sell-off in the dollar came after the Bank of Japan maintained ultra-low interest rates. The yen initially gained sharply, but recovered on expectations for tighter policy in the coming months and after the dollar sold off following poor economic data.

Data showed that U.S. retail sales fell more than expected in December, pulled down by declines in purchases of motor vehicles and a range of other goods. They fell 1.1% last month. Data for November was revised to show sales dropping 1.0% instead of 0.6% as previously reported.

A separate report from the Labor Department showed the producer price index for final demand decreased 0.5% in December after rising 0.2% in November. The PPI report followed data last week showing that monthly consumer prices fell for the first time in more than 2-1/2 years in December.

“The PPI and retail sales numbers show that there are disinflationary pressures going on,” said Juan Perez, director of trading at Monex USA in Washington.

He added that the Fed wants to slow the economy so that demand fades. “If demand is not there, that means prices are going to come down as result. If that’s the case, then the Fed can be less hawkish” and can cut down the size of its rate increases, Perez said.

U.S. manufacturing output also fell 1.3% in December, more than expected, data showed.

In mid-morning trading, the dollar index, which measures the safe-haven dollar against six peers fell 0.7% at 101.73.

The dollar fell against the euro, sterling, and the commodity-linked Australian and New Zealand dollars.

BOJ STAYS STEADY
At a two-day policy meeting, the BOJ kept intact its yield curve control (YCC) targets, set at -0.1% for short-term interest rates and around 0% for the 10-year yield, by a unanimous vote. It also made no change to its guidance that allows the 10-year bond yield to move 50 basis points either side of its 0% target.

Some analysts said the BOJ was likely to tighten policy soon and the currency walked back some of its losses.

The BOJ stunned the market in December by raising its cap on the 10-year yield to 0.5% from 0.25%, doubling the band it would permit above or below its target of zero. Since then, speculation has swirled that the BOJ could tweak its yield curve control (YCC) policy further or even scrap it.

“There are particular things that the market is desperately eager to see manifest. The market wanted to see the BOJ start looking more hawkish so they can start investing in Japanese debt and get something out of it. But that didn’t happen,” Monex USA’s Perez said.

“But the BOJ never said: ‘Oh guys, you’re right, we’re tightening.’ It’s what the market wants the BOJ to be,” he added.

The dollar rose as much as 2.7% to 131.58 yen before gains were pared. It was last up 0.1% at 128.22 yen.

Sterling rose to a five-week high even as consumer price inflation fell to a three-month low as core CPI failed to moderate, remaining at 6.3%. The pound was last up 0.6% at $1.2366.

Meanwhile, the euro firmed 0.6% to $1.0853 after European Central Bank member Francois Villeroy de Galhau said it was too early to speculate about what the central bank would do at the March meeting. Media reports on Tuesday said the ECB could slow its pace of tightening further in March.

Commodity currencies extended their gains after the U.S. data.

The Australian dollar rose against the greenback, hitting its highest since August last year. It was last up 0.8% to US$0.7040. The New Zealand dollar also rose, up 1.1% at US$0.6498, after earlier rising to its highest level in a month.