Yen rallies against euro, dollar as rate outlooks diverge

Zawya

30-01-2025

The yen made broad gains on Thursday as Japan looks on track to keep raising interest rates while others cut, with the European Central Bank reducing borrowing costs by a further 25 basis points on Thursday.
The yen was the notable mover in currency markets, with the dollar down 0.69% to 154.13 yen and the euro falling 0.81% to 160.38 yen.
The single currency dipped 0.16% against the dollar to $1.0403 after data showed Germany's economy shrank more than expected in the fourth quarter.
It showed little reaction to the ECB's widely expected rate cut. The central bank kept the door open to further policy easing as concerns over a lacklustre economy supersede worries about persistent inflation.
"The ECB's decision to cut its deposit rate from 3% to 2.75% today came as no surprise and the accompanying statement implies that more cuts are coming, as is widely anticipated," said Jack Allen-Reynolds, deputy chief euro zone economist at Capital Economics.
"We think the Bank will have to lower interest rates further than most investors expect."
Markets are priced for further ECB cuts in March, April and June, with about 90 basis points of easing implied for 2025.
In contrast, Bank of Japan Deputy Governor Ryozo Himino said on Thursday that Japan's central bank would continue to raise interest rates if the economy and prices move in line with the bank's forecasts.
The dollar index was little changed at 107.97 after ticking up slightly overnight, when the Federal Reserve paused its easing cycle. The index tracks the U.S. currency against six major peers.
Data on U.S. advance GDP showed the economy grew at a 2.3% annualised rate in the fourth quarter of 2024, down from 3.1% in the third quarter and below analysts' expectations of a 2.6% expansion rate.
PARSING POWELL
The dollar briefly popped higher overnight when the Fed dropped a reference to making "progress" on inflation, which was taken as hawkish.
Yet Chair Jerome Powell used his press conference to say progress was still being made and rates were "meaningfully" above neutral, implying there was still plenty of scope to cut.
As a result, Fed fund futures still imply around 48 basis points of easing this year, broadly unchanged from earlier in the week. The next move is not expected until June.
The Fed's pause came as Canada and Sweden both cut rates by a quarter point overnight, but removed guidance on future easing, noting uncertainty about U.S. tariff policy.
Howard Lutnick, U.S. President Donald Trump's nominee to run the Commerce Department, said on Wednesday that Canada and Mexico could avoid looming U.S. tariffs if they acted swiftly to close their borders to fentanyl.
Going the other way on rates, Brazil's central bank hiked by a full percentage point to 13.25% overnight and flagged more to come. The attraction of such high yields has seen the real rally around 5% since the start of the year.
Elsewhere, the pound was down 0.1% at $1.2433, while the Australian dollar fetched $0.622, also down 0.1%.
(Reporting by Wayne Cole in Sydney and Harry Robertson in London. Editing by Michael Perry, Mark Potter and Alex Richardson)