The Japanese yen declined on Monday, giving back part of the strong gains it recorded last week following weak growth data, while the US dollar held steady as recent inflation figures reinforced bets on Federal Reserve interest rate cuts later this year.
Liquidity is likely to remain thin in Mondays trading, with markets closed in the United States, China, Taiwan, and South Korea due to holidays.
The yen fell by 0.5% to 153.43 against the dollar on Monday, after jumping about 3% last week its biggest weekly gain in roughly 15 months following a landslide election victory by Prime Minister Sanae Takaichi and her Liberal Democratic Party.
However, Mondays data revealed some challenges facing Takaichi and her government, as the Japanese economy barely grew in the past quarter, posting an annualized expansion of just 0.2%.
Mohamed Al-Sarraf, assistant for FX and fixed income at Danske Bank, said: After the election, the political dust may be settling somewhat at least in the near term and we are seeing the yen become more sensitive to data.
Governmentcentral bank coordination without direct requests
Bank of Japan Governor Kazuo Ueda and Prime Minister Takaichi held their first bilateral meeting since the election on Monday.
Ueda said the two sides conducted a general exchange of views on economic and financial developments, noting that the prime minister made no specific requests regarding monetary policy.
The Bank of Japan holds its next interest rate meeting in March, where traders assign a 20% probability to a rate hike. Economists polled by Reuters last month expected the central bank to wait until July before tightening policy again.
The Bank of Japan raised its key policy rate in December to its highest level in 30 years at 0.75%, but it remains well below most major economies, contributing to notable yen weakness and prompting direct currency interventions in past years.
US rate cut bets
Data released on Friday showed US consumer prices rose less than expected in January, giving the Federal Reserve additional room to ease monetary policy this year.
Kyle Rodda, senior financial analyst at Capital.com, said: Markets have started to hint at pricing in a third rate cut.
Futures indicate about 62 basis points of easing over the remainder of the year, equivalent to two quarter-point cuts, with roughly a 50% chance of a third. The next cut is most likely in June, with markets assigning an 80% probability to that move.
Currencies and bonds moves
The euro slipped by less than 0.1% to $1.1862, while the British pound edged down slightly to $1.3647.
The US dollar index which measures the currency against six major peers rose by less than 0.1% to 97, after falling 0.8% last week.
Most post-inflation data moves were concentrated in the bond market, where the US two-year Treasury yield which reflects Fed policy expectations closed at its lowest level since 2022 on Friday, while the 10-year yield fell by 4.8 basis points. US bond markets remain closed on Monday.
The Swiss franc, Australian, and New Zealand dollars
The Swiss franc edged lower to 0.7696 against the dollar after gaining more than 1% last week, as investors grew more cautious about possible Swiss National Bank intervention to curb the strength of the traditional safe-haven currency.
OCBC analysts said in a note: Any further gains in the franc increase the risk of downside surprises relative to the Swiss National Banks inflation forecasts.
They added that this could challenge the banks recent tolerance for currency strength, even if the probability of a return to negative rates remains low.
Meanwhile, the Australian dollar rose 0.2% to $0.7083, remaining below last weeks three-year high of $0.71465, while the New Zealand dollar held steady at $0.6041 ahead of the Reserve Bank of New Zealand policy meeting on Wednesday, where rates are widely expected to be kept unchanged.