The dollar softened while the yen found its footing in Tuesday's Asian trading session, as investors shifted their focus to the U.S. inflation data release and a series of central bank meetings.
This shift follows a robust Monday for the USD, fueled by climbing yields and a weakening of dovish expectations for the Federal Reserve in the wake of robust labor market data released last Friday.
The U.S. Dollar Index, which measures the currency against a basket of other major currencies, fell to 103.93 as of Tuesday, 1:25 AM EST. This follows a close of 104.10 on Monday. The dollar also declined against the Japanese yen, trading 0.5 percent lower at 145.46 yen.
The recent volatility in the USD/JPY pair can be attributed to conflicting signals from the Bank of Japan. Hawkish remarks by the central bank had caused the yen to surge, but this was followed by a news report downplaying the prospect of an imminent policy change, which pushed the yen back down.
Meanwhile, U.S. bond yields are rising, with the two-year yield at 4.75 percent, the five-year yield at 4.26 percent and the 10-year yield at 4.28 percent.
This week's economic outlook
This week's economic calendar is packed with important releases, so the currency's volatility could increase considerably over the following few trading sessions.
The dollar has been on a downward trend since October, fueled by the U.S. inflation report. While the Federal Reserve is expected to maintain its current interest rate range of 5.25-5.50 percent this week, the spotlight is shifting to the updated "dot plots" for future rate projections and Chair Jerome Powell's upcoming press conference.
Despite strong labor data and easing inflation, the Fed remains cautious, hinting at further policy tightening. Today's U.S. inflation report, due at 1:30 PM GMT, will shape Wednesday's crucial Fed decision. This, along with updated forecasts, will guide market expectations and set the direction for the U.S. Dollar.
Economists polled by Reuters anticipate a flat headline inflation rate for November, with core inflation expected to remain steady at four percent annually, exceeding the Fed's target of two percent.
DailyFX estimates differ slightly, forecasting the annual rate was down to 3.2 percent from 3.1 percent last month. Core CPI is forecast to increase by 0.3 percent month-on-month, with the same 4.0 percent annual rate projection.
In order to achieve Wall Street's anticipated dovish monetary policy, the latest CPI report must show a clear and convincing deceleration in the cost of living. Otherwise, softer-than-expected numbers could lead to a hawkish reevaluation of interest rate expectations, causing a significant rise in U.S. Treasury yields and strengthening the U.S. dollar.
Other currencies
Joining the yen, other major currencies also saw appreciation. As of writing, the euro trades at $1.0779, while sterling has reached $1.2580.
Despite the rise, the EUR/USD is reversing course this month after a strong November. It is falling below both the 200 and 100-day SMAs, a bearish technical signal. Should the pullback continue, a retest of the 50-day SMA could occur soon. Further weakness might redirect attention toward trendline support around 1.0620.
Both the Australian dollar and New Zealand dollar gained ground as iron ore experienced a price surge and the Chinese real estate sector rebounded. The New Zealand dollar rose 0.57 percent to $0.6158, and the Aussie crept 0.4 percent higher to reach $0.6596.