**Forex Market Update: Dollar Strengthens as Yen Weakens; Traders Eye Upcoming U.S. Labor Data**
*By Tom Westbrook*
SINGAPORE (Reuters) – In a notable market development, the U.S. dollar maintained its strength on Wednesday, while the Japanese yen approached levels that previously prompted government intervention. This shift comes on the heels of robust economic data from the U.S., which has led to an increase in bond yields and reduced expectations for Federal Reserve rate cuts.
The yen reached a low of 158.42 against the dollar, marking its weakest point in nearly six months, before stabilizing at 158.19. Japan’s Finance Minister Katsunobu Kato cautioned against speculative selling of the yen just a day prior, as the currency nears the critical psychological barrier of 160—an area that had triggered dollar selling six months ago.
“Chart analysis indicates this is a pivotal resistance level,” commented Bart Wakabayashi, Tokyo branch manager at State Street. “With the release of strong U.S. economic indicators, interest rates are expected to rise, pushing out expectations for Fed rate cuts to the summer or later.”
The shift in sentiment around the Fed’s policy options has been substantial, with discussions now leaning toward the possibility of rate hikes rather than cuts, suggesting further strength for the dollar.
Meanwhile, the euro fell approximately 0.5% overnight, trading around $1.0351, while the British pound also dipped to $1.2478. The Chinese yuan faced pressure, hitting a six-month low of 7.3319 against the dollar.
As traders brace for the upcoming U.S. labor data scheduled for Friday, uncertainty looms over the market. Additionally, the political landscape is in flux as Donald Trump is anticipated to begin his second presidential term on January 20, introducing a series of policy changes that could impact market direction.
Recent U.S. economic reports indicate a positive trajectory, with job openings unexpectedly rising in November and a decrease in layoffs. The services sector showed notable growth in December, and input price measures reached a two-year high, signaling potential inflationary pressures.
In response, bond markets reacted with a significant uptick in yields; 10-year Treasury yields rose more than eight basis points, hitting an eight-month high of 4.699%, while the 30-year yield increased 7.4 basis points, nearing the 5% threshold.
Data from LSEG indicates traders currently anticipate only about 37 basis points of easing from the Fed this year, illustrating the market’s shift in focus.
The strong performance of the U.S. economy contrasts sharply with underlying weakness in Australia and New Zealand, leading to substantial declines in the Antipodean currencies. The New Zealand dollar is grappling with an outright recession, having lost over 11% against the greenback last year, sitting at $0.5634—close to its two-year low of $0.5588 from late December.
The Australian dollar, similarly affected, has plummeted 9.2% against the dollar thus far in 2024, currently trading at $0.6228 and just above its 2022 low of $0.6170. Recent inflation data from Australia showed headline CPI modestly increasing, although a decrease in core inflation adds pressure for potential rate cuts.
As forex traders navigate this landscape, attention should be focused on the upcoming U.S. labor data and the broader implications of economic indicators on the Fed’s monetary policy direction. This environment presents both challenges and opportunities in the currency markets as traders adjust their strategies to align with changing dynamics.
