The dollar dipped sharply to 7-month lows.

The US core PCE prices index increased 0.2% for November with the year-on-year rate declining to 4.7% from 5.0% which was in line with consensus forecasts.

The University of Michigan 1-year inflation expectations index declined to 4.4% for the final December reading from the flash reading of 4.6% with the 5-year index edging lower to 2.9% from 3.0%.

Treasuries struggled to make any headway despite the broadly positive developments surrounding inflation with the 10-year yield around 3.85%.

There were reports in the Japanese press that the Bank of Japan would increase its inflation forecasts with the 2024 rate close to the forecast. In this context, there was increased speculation that the Bank of Japan would move away from the extremely accommodative monetary policy. Speculation over a Bank of Japan policy shift this year triggered another round of strong yen buying on Monday.

The dollar dipped sharply to 7-month lows below the 130.00 level with a trough near 129.50 before a recovery to near 130.00.

The latest Chinese PMI data was very weak, especially for the services sector amid further coronavirus disruption, but there was also optimism over a 2023 recovery as restrictions are eased. The Chinese yuan posted net gains.

Uncertainty over near-term developments contributed to very choppy trading conditions in Asia on Tuesday.

CFTC data recorded a sharp decline in short Sterling positions to below 6,000 contracts from near 26,000 in the data released just before Christmas and the smallest short position since early March 2022. There was a renewed net increase to near 11,000 in the latest week.

The Euro posted net gains into the year-end period with hawkish ECB rhetoric continuing to provide net support. EUR/USD edged above 1.0700 amid the lack of liquidity. EUR/USD retreated to near 1.0650 on Monday, but resisted further losses.

Higher US yields failed to underpin the dollar against the yen. The yen gained some support from weaker equities.

Bank of Japan speculation was key in boosting the yen. USD/JPY dipped below the 130.00 level to 7-month lows at 129.50 before a tentative recovery. The yen also gained strong support on the crosses with EUR/JPY at 3-month lows below 139.00.

The Swiss franc overall was little changed despite sharp moves in the yen and gold. EUR/CHF settled around 0.9860 with USD/CHF just below 0.9250.

Sterling was hampered by weaker equities amid very thin trading conditions. GBP/USD was unable to move above 1.2100, but with support above 1.2000 and it settled around 1.2060.

There was choppy trading in commodity currencies amid Chinese uncertainty. The Australian dollar secured net gains with AUD/USD close to 0.6800. USD/CAD held above 1.3500 and traded around 1.3550 on Tuesday with only limited support from higher oil prices.

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