Written by Harry Robertson and Tom Westbrook
LONDON/SINGAPORE (Reuters) – The Japanese yen rose for a second straight day on Thursday after data on Wednesday showed U.S. inflation slowing, while the dollar found a footing against other currencies after a sharp decline the day before.
Data on Wednesday showed that US inflation slowed to 0.3% in April from the previous month, down from 0.4% in March and below expectations for another reading of 0.4%.
Annual core inflation – which excludes volatile food and energy prices – fell to a three-year low of 3.6%. Meanwhile, retail sales remained flat, suggesting that the conditions for a Fed rate cut are in place.
The dollar fell 1 percent against the yen on Wednesday after the data was released, and fell 0.38 percent on Thursday to 154.32, after falling to 153.6 before weak Japanese growth numbers took some of the yen's luster off.
The Japanese currency has fallen by about 9.5% this year, as the Bank of Japan kept its monetary policy accommodative, while rising federal interest rates attracted money towards US bonds and the dollar. The yen was particularly sensitive to any widening or closing of interest rate differentials.
The index, which tracks the currency against six major peers, was up 0.11% at 104.32 on Thursday after falling 0.75% on Wednesday, as investors raised their bets on Federal Reserve rate cuts, now envisioning two cuts by the end of the year.
Some analysts said Fed officials would want to see evidence of inflation's downward path before agreeing to cuts, a point Minneapolis Fed President Neel Kashkari made on Wednesday.
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“In practice, there is not much to be optimistic about,” said Francesco Pesole, FX strategist at ING. “Inflation is moving in the right direction but still not at levels that would allow the Fed to cut interest rates.”
Investors are now awaiting US personal consumption expenditures (PCE) inflation data in late May, Bisol said. “My view at this point is that we could default to another couple of weeks of low volatility, lack of trend, and range trading.”
The euro hit its highest level in two months at $1.0895 on Thursday before falling to trade 0.1 percent lower at $1.0874. The British pound reached its highest level in a month at $1.2675 before retreating slightly.
The Australian dollar, which rose 1 percent on Wednesday, hit a four-month high of $0.6714 but then stopped after an unexpected rise in Australian unemployment.
The last was at $0.6684 as traders priced in any risk of a rate hike in Australia.
It touched a three-week high of $66,695 before falling slightly.