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The DXY Index shed 0.6% to 109.27 overnight, its first decline in six sessions. The DXY’s fall mirrored the 0.6% decline on January 14, driven by hopes for a gradual tariff policy by the incoming Trump administration. Pete Hegseth’s heated confirmation hearing as Defense Secretary yesterday did not eclipse the market’s focus on data and hopes for a more gradual approach to Trump’s tariffs. The US Treasury (UST) 2Y yield eased 1.3 bps to 4.367% on a lesser-than-expected rise in US PPI final demand inflation to 3.3% YoY in December; consensus had expected an increase to 3.5% from 3% a month earlier. Except for the JPY, all currencies in the DXY basket appreciated. Although Bank of Japan Governor Ryozo Himino kept the door open for a rate hike at the January 24 policy meeting (the OIS market is pricing a 61% probability), he also admitted difficulty to discern the right timing for a change. USD/JPY rose 0.3% to almost 158 overnight, partly reversing the last three days’ declines.
However, markets are wary that a higher-than-expected CPI inflation print today could lead the USD to mirror last Friday’s rise on the better-than-expected nonfarm payrolls. The UST 10Y yield did not ease with the 2Y yield and rose by 1.5 bps to 4.792%, anticipating CPI inflation to rise to 2.9% YoY (0.4% MoM) in December from 2.7% YoY (0.3% MoM) in November. The futures market continued to price in only one rate cut by the Fed in June this year, less than the Fed’s guidance for two reductions. Today’s confirmation hearing of Marco Rubio, a leading China hawk, as Secretary of State will matter more than Hegseth’s contentious hearing yesterday. Like Hegseth, Rubio will likely face tough questioning from critical senators and align with supportive senators.
All said, Scott Bessent’s confirmation hearing as Treasury Secretary tomorrow will still be the most anticipated by markets, given the hopes from a gradual approach to tariffs.
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