Tom Westbrook
SINGAPORE (Reuters) - The dollar steadied on Thursday as U.S. inflation cooled and bond yields fell, while the yen hit a one-month high on rising bets on rate hikes in Japan.
The yen was the biggest gainer against the dollar after weaker-than-expected U.S. inflation data, extending gains in Asia as the likelihood of a Federal Reserve rate cut grew and amid talk of a Bank of Japan rate hike next week.
The yen firmed to 155.21 against the dollar, its highest level since December 19. The yen has gained about 1.2% over the past two trading days.
Recent comments from Bank of Japan Governor Kazuo Ueda and Deputy Governor Ryozo Himino have made it clear that a rate hike will be discussed at least at next week's policy meeting, with the market pricing in the possibility of a 25 basis point rate hike About 78%.
"The fact that they are talking about hiking at this time before the meeting may be testing the waters," said Bart Wakabayashi, a branch manager at State Street Bank in Tokyo.
The euro remained largely steady after the release of US inflation data and held steady at $1.0283 throughout the Asian trading day, while the greenback edged higher elsewhere, with the U.S. dollar index ending three days of losses, edging higher to 109.18.
There was little immediate reaction from currency markets to the Gaza ceasefire agreement, although the Israeli shekel did hit a one-month high on Wednesday.
U.S. core inflation in December was 0.2% month-on-month, in line with forecasts and lower than November's 0.3%. Annualized growth was 3.2%, below expectations of 3.3%. Earlier British inflation data were also weaker than expected, and Bank of England policymakers said now was the right time to lower interest rates.
Traders who had been worried about inflation breathed a sigh of relief and bought stocks, sending the benchmark 10-year Treasury yield down more than 13 basis points.
In addition to the yen's gains, currency reactions also began to ease on Thursday as traders kept a close eye on still-strong U.S. economic data and the potential for tariffs when Donald Trump takes office on January 20.
"Certainly, the dollar has moved out of spreads recently," Deutsche Bank macro strategist Tim Baker said in a note. "But not that much. Given the geopolitical backdrop, dollar risk premiums should rise.
"When U.S. economic growth outperforms other countries to this extent, it is completely normal for the dollar to strengthen - and in previous events, the dollar has exceeded this relationship."
The Chinese yuan, which is on the frontline of tariff risks, has been trading near the weak end of its trading range, at 7.3316, throughout the Asian session. (CNY/)
The New Zealand dollar was trading at $0.5602, not far from Monday's two-year low of $0.5543, while the Australian dollar received only a brief boost from some strong employment data.
The index hit a one-week high of $0.6248 after the data was released, but fell below $0.62 as the session progressed and remained close to the five-year low of $0.6131 hit on Monday. (AUD/)
Sterling fell 0.3% to $1.2212, with smaller currencies seeing little relief.
The rupiah fell to a six-month low after the Indonesian central bank unexpectedly cut interest rates on Wednesday.
Meanwhile, the South Korean won has not been boosted by expectations that the central bank will cut interest rates on Thursday and keep the benchmark interest rate at 3%.
(Reporting by Tom Westbrook; Editing by Thad Said and Kate Mayberry)