FOREX-Dollar pares gains after CPI, yen tumbles on Japan spending fears

By Karen Brettell

NEW YORK, Jan 13 (Reuters) - The dollar pared earlier gains on Tuesday after December consumer inflation largely matched economists’ expectations, while the yen hit its lowest against the U.S. currency since July 2024 on concerns about more fiscal spending in Japan.

The Consumer Price Index rose 0.3% last month for an annual gain of 2.7%, while core CPI rose by 0.2% in December for a 2.6% year-on-year increase.

The data gives the Federal Reserve more room to cut rates as policymakers balance concerns about still sticky price pressures against a weakening labor market.

Market reaction suggests that traders were positioned for a potentially larger increase in prices, said Eric Theoret, currency strategist at Scotiabank in Toronto, noting risk-sensitive currencies including the Australian dollar rallied after the report.

“There's a concern now that we've maybe reached the local lows in terms of inflation,” Theoret said. “Maybe people were positioned for the alternative, which would have been an upside surprise.”

The dollar index =USD, which tracks its performance against a basket of currencies including the yen and the euro, was last up 0.15% on the day at 99.02, with the euro EUR= down 0.06% at $1.166.

The Australian dollar AUD= was last down 0.21% against the U.S. dollar at $0.6696 after briefly bouncing to $0.6725 after the CPI data.

Sterling GBP= weakened 0.05% to $1.3452.

The dollar was boosted on Friday after data showed solid jobs growth in December, which further boosted expectations that the U.S. central bank will keep rates on hold at its January 27-28 policy meeting.

Fed funds futures traders' pricing shows that a cut is not seen as likely until June.

Traders also follow the issue of Fed independence after the U.S. Department of Justice threatened to indict Federal Reserve Chair Jerome Powell in connection with a building renovation project.

Global central bank officials issued a coordinated statement of support for Powell on Tuesday.

U.S. President Donald Trump is expected to announce in the coming weeks his candidate to replace Powell as Chair when his term ends in May.

NO RESPITE FOR THE YEN

The yen was among the largest movers on Tuesday as concerns grew that the Japanese government will adopt more fiscally expansionist policies to boost economic growth.

Japanese Prime Minister Sanae Takaichi may call an early general election, the head of her party's coalition partner said on Sunday, after media reported she was considering a February vote.

It would give Takaichi a chance to capitalize on the strong public approval ratings she has enjoyed since taking office in October.

“The implications for the yen are quite negative because Takaichi is a dove on both the fiscal and monetary fronts, so fiscally she would be very comfortable with a looser, higher deficit policy,” said Theoret.

The Japanese yen JPY= weakened 0.51% to 158.95 per dollar.

The rapid weakening in the yen is also putting traders on watch for a possible intervention to shore up the currency.

Japan's Finance Minister Satsuki Katayama said she and U.S. Treasury Secretary Scott Bessent shared concerns over what she called the yen's recent "one-sided depreciation", as Tokyo stepped up threats of intervention to stem the currency's fall.

Rising geopolitical tensions also remain in focus after the United States took Venezuelan leader Nicolas Maduro into custody and as Trump expresses his desire for the U.S. to acquire Greenland.

About 2,000 people including security personnel have been killed in protests in Iran, an Iranian official said on Tuesday, the first time authorities have acknowledged the high death toll from an intense crackdown on two weeks of nationwide unrest.

Traders are also watching for a Supreme Court decision on the legality of Trump’s tariff policies, which could come as soon as Wednesday.

In cryptocurrencies, bitcoin BTC= gained 1.59% to $92,421.