Dollar falls on a slowdown in inflation, eyes on JPY

As it turns out, investors got exactly what they wished for when it comes to inflation reports, even if equities turned out to be rather less euphoric than bonds after the fact. There is a possibility that this may be due to comments made by Federal Reserve officials in recent months underscoring their willingness to still raise the benchmark rate above 5% later this year. It was also emphasized that they were prepared to hold it there for a sustained period of time. Furthermore, it might also be the case that fund managers are beginning to take into consideration the fact that recessions have often been accompanied by this kind of rapid slowdown in CPI growth when it comes to this sort of slowdown in CPI growth. A series of strong quarterly declines in the inflation rate have caused equities to fall as a result, even when a recession is not involved.

As a result, that raises a problem for investors, especially in light of the Fed's stance. Possibly, the central bank needs inflation to keep decelerating like this in order to persuade it to stop hiking rates sooner rather than later. There is, however, the possibility of earnings and equities struggling to remain buoyant in the face of a disinflationary environment.

Thus, the dollar edged lower in early European trade Friday, continuing the previous session's selloff after slowing U.S. inflation opened the door for the Federal Reserve to ease the pace of its interest rate increases as a result of the ongoing recession.

Earlier in the session, the US Dollar Index, a measure of the greenback's value against a basket of six other currencies, slipped 0.1% to 101.965 after dropping to its lowest level since June.

Currently, the index is headed for a 1.6% decline this week, which is its worst performance since early November.

In contrast, the JPY appreciated against the dollar by 0.6% to 128.51, with the USD/JPY reaching levels not seen since the end of May last year. The main reason for this is that there are rising expectations that the Bank of Japan will be forced to adopt another hawkish turn next week as a result of soaring inflation rates.

After surprising the market in December by raising the band around its 10-year bond yield target by a small amount, the BOJ is expected to tighten monetary conditions in the coming week with a similar move.

A wave of emergency bond-buying corralled Japan's 10-year government bond yield on Friday after breaching the central bank's new ceiling for the first time in decades, in the market's most direct challenge yet to decades of ultra-easy monetary policy.

Investors have been heading for the exits due to rumours swirling around the market suggesting that the Bank of Japan could revise its policy on yield curve control (YCC) as early as next week, or even abandon it altogether.

In response, 10-year Japanese government bond yields rose by as much as 4 basis points to 0.54%, a level not seen since mid-2015 and well beyond the BOJ's recently widened range of -0.5% to +0.5%, established in a shock decision just three weeks ago.

Throughout the yield curve, there was evidence of stress, which prompted the BOJ to announce that it would be carrying out two separate emergency buying rounds worth 1.3 trillion yen ($1,3 billion) together. It is estimated that the central bank holds 80% to 90% of some bonds that are on the market. Due to this, the 10-year yield gradually eased back, which helped to restore calm in the market.