The US Dollar (USD) is closing the week on a stronger footing, rising against all major currencies, with the Japanese Yen (JPY) the clear laggard despite the Bank of Japan’s rate hike to 0.75%. While a softer-than-expected US CPI briefly weighed on the dollar, doubts over the quality of the inflation slowdown and pre-holiday positioning have supported USD resilience, Scotiabank's Chief FX Strategists Shaun Osborne and Eric Theoret report.

Dollar resilient into holidays despite softer US CPI

"The USD is rounding off the week on a firmer note, rising against all the major currencies on the day. The JPY is the main underperformer, falling more than 1% against the USD, despite the BoJ raising its benchmark rate to 0.75%, the highest since 1995. Losses for the other major currencies are less pronounced. The USD is showing a degree of resilience ahead of the holiday period, which may be having some effect on markets already via position adjustment and liquidity."

"The dollar dipped on the lower-than-expected US CPI yesterday but beyond the headlines, it is harder to detect the same sort of progress in some of the key core measures that the Fed typically pays close attention to. Basic food prices continue to rise strongly, meaning affordability will remain an issue for many people. And there were some assumptions made perhaps at the BLS about what the missing Oct data might have looked like which helped achieve the unexpected deceleration in prices."

"While markets reversed the initial reaction to the data, there can be no doubt that the Fed doves and the administration will leverage the CPI data for easier Fed policy. The snap higher from yesterday’s DXY low around the CPI data is starting to show some signs of flagging near resistance on the short-term chart around 98.75. Additional gains through here may signal scope for a bit more strength into the new year. We remain of the view that DXY risks remain tilted towards more losses and new lows in the next few weeks, however."