Dollar Down, Investors Digest Surprise PBOC Benchmark Cut

© Reuters.

By Gina Lee

AiVIF.com – The dollar was down on Monday morning in Asia, with the People's Bank of China (PBOC) springing a surprise benchmark cut. Investors are also looking ahead to the U.S. Federal Reserve's January policy decision and the timetable for interest rate hikes.

The U.S. Dollar Index that tracks the greenback against a basket of other currencies inched down 0.01% to 95.153 by 10:58 PM ET (3:58 AM GMT).

The USD/JPY pair was up 0.20% to 114.43 with the Bank of Japan handing down its policy decision on Tuesday.

The AUD/USD pair inched up 0.07% to 0.7211 and the NZD/USD pair inched up 0.08% to 0.6803.

The USD/CNY pair inched down 0.08% to 6.3478, with Chinese data released earlier in the day showing that the GDP grew 4% year-on-year and 1.6% quarter-on-quarter in the fourth quarter of 2021. The data also showed that industrial production grew 4.3% year-on-year and retail sales grew 1.7% year-on-year in December, while the unemployment rate was at 5.1%.

The GBP/USD pair inched up 0.04% to 1.3678.

Chinese bonds rose, while the yuan fell after the PBOC cut borrowing costs for medium-term loans for the first time since April 2020. Ten-year government bond futures rose to their highest since June 2020 after the move, and the yuan began onshore trade marginally softer at 6.3555 per dollar.

Meanwhile, the dollar's move follows its jump on Friday along with U.S. yields. The hawkish interest rate provided support for the U.S. currency even as momentum for gains started to wane.

"Friday's move suggests to me that the interest rate driver for dollar strength is not dead and buried. It may not necessarily return to drive new dollar highs, but "we've had a hawkish twist out of every Fed meeting since June 2021," said National Australia Bank (OTC:NABZY) head of foreign exchange strategy Ray Attrill.

Investors are also looking ahead to the Fed’s next policy decision, due to be handed down on Jan. 26. J.P. Morgan CEO Jamie Dimon remarked that there could be "six or seven" interest rate hikes in 2022, while hedge fund manager Bill Ackman floated tweeted over the weekend that he expects an initial 50 basis point hike.

U.S. markets are closed for a holiday on Monday, but benchmark 10-year futures were sold to a two-year low, and Fed funds futures also fell.

Elsewhere a month-long rally for sterling petered out, but some investors believe it could resume gains should inflation data prompt the Bank of England (BOE) to hike interest rates.

"Interest rate markets are currently pricing an 80% plus chance of a 25 bp rate hike by the BOE on Feb. 3," said Commonwealth Bank of Australia (OTC:CMWAY) strategist Joe Capurso.

"A quicker pace of inflation could see pricing move closer to 100%."