On Wednesday morning, the U.S. dollar found firm footing after experiencing losses earlier in the week, as market participants awaited forthcoming inflation reports. Concurrently, the Japanese yen depreciated to its weakest position in eighteen months amid political uncertainties.
By 04:30 ET (09:30 GMT), the Dollar Index, which measures the greenback’s performance against a selection of six major currencies, hovered close to unchanged at 98.910. This marked a recovery from its earlier slip at the start of the week.
Earlier on Tuesday, the dollar experienced a slight decline triggered by inflation data that many interpreted as potentially providing the Federal Reserve with additional flexibility to reduce interest rates. Specifically, core Consumer Price Index (CPI) figures for December revealed a 0.2% increase month-on-month and a 2.6% rise year-on-year, which was marginally below analysts' expectations.
Despite this softer inflation reading, market reactions reinforced a short-term optimism towards the dollar. Analysts at ING observed that Federal Reserve policy pricing remained largely unaffected and the dollar regained strength swiftly following the initial dip.
Market watchers anticipate more inflation-related data later on Wednesday, including Producer Price Index (PPI) readings for October and retail sales figures for November, which could provide further clarity on the inflation trajectory and inform expectations of the Fed’s monetary stance.
Supporting the greenback, Federal Reserve Chair Jerome Powell received collective backing from global central banking counterparts following threats from the Trump administration regarding potential legal actions linked to his testimony about renovation projects at the Fed's headquarters. This development raised concerns about the central bank’s independence.
ING analysts commented that this episode might ultimately strengthen the dollar. Powell could emerge with a reputation for a firmer hawkish stance as a means to safeguard the Fed’s autonomy.
Additionally, financial markets are monitoring a pending U.S. Supreme Court judgment on the legality of tariffs imposed during the Trump administration, with a decision possibly expected later in the day.
Across the Atlantic, the euro experienced marginal gains, with the EUR/USD pairing inching 0.1% higher to 1.1650. This movement came ahead of discussions involving U.S., Danish, and Greenland officials focused on the future of Greenland, a territory known for its mineral wealth.
According to ING, the threats previously made by the U.S. regarding Greenland have so far exerted minimal market impact. Consequently, even if discussions yield collaborative outcomes, there appears to be limited current risk priced in that would unwind any market premiums. Any positive developments in these talks could alleviate lingering geopolitical risks affecting European currencies.
Still, the outlook remains cautious. Analysts expect that while supportive news might temporarily slow the downward trend of EUR/USD, they continue to project a decline toward 1.1600 in the short term. Meanwhile, GBP/USD saw a modest rise of 0.2%, reaching 1.3451.
In Asian markets, the USD/JPY exchange rate climbed 0.1% to 159.15, peaking earlier at its highest since June 2024. The depreciation of the yen is tied to reports that Japan’s Prime Minister Sanae Takaichi intends to announce the dissolution of parliament on Wednesday, with a snap lower-house election possibly slated for February 8.
Investor concerns center around Takaichi’s campaign promises, which include expansionary fiscal programs such as sizable stimulus packages aimed at stimulating growth and countering deflation. These measures could exacerbate government debt levels and delay tighter monetary policy from the Bank of Japan, thereby applying downward pressure on the yen.
This anticipated combination of aggressive fiscal policy and delayed monetary tightening, dubbed the “Takaichi trade,” has intensified selling pressure on the Japanese currency in recent trading sessions.
Elsewhere, the USD/CNY rate declined 0.1% to 6.9736 following the publication of December’s Chinese trade statistics. These revealed a strong surplus, with exports surpassing expectations and imports growing healthily, signaling resilient external demand coupled with indications of bolstered domestic consumption.
For the entire year 2025, China’s trade surplus expanded to a record $1.25 trillion. While export disruptions affecting shipments to the United States were evident, strong demand from other regions largely offset these challenges.
The Australian dollar remained relatively steady, with AUD/USD essentially unchanged at 0.6688.