The dollar declined through the latter months of 2023 as the Federal Reserve hinted it was finished with rate hikes and traders priced in steep cuts

The dollar dropped in Asia on Thursday as traders awaited U.S. inflation data to see whether bets on as many as five Fed interest rate cuts this year were justified, while weak wages data dragged the yen to a six-week low on the euro.

Bitcoin traded at $46,400, just short of a two-year high, with investors welcoming the much-expected U.S. approval of spot bitcoin ETFs. The approval opens the way for institutional buying and had been priced in over recent months, driving the crypto currency up 70% since mid-October.

The Australian and New Zealand dollars were each around 0.3% higher at $0.6721 and $0.6294, respectively, with moves capped ahead of the U.S. data at 1330 GMT. The euro gained 0.1% to $1.0979 and sterling added 0.2% to $1.2767.

The dollar index dropped 0.1% to 102.23. The dollar declined through the latter months of 2023 as the Federal Reserve hinted it was finished with rate hikes and traders priced in steep cuts. While that pricing has moderated slightly, and the dollar recovered, futures still show the market expects 140 bps of cuts this year with a two-thirds chance they will begin as soon as March, leaving prices sensitive to data surprises.

In our view investors are still too optimistically positioned for Fed rate cuts, said Rabobank senior FX strategist Jane Foley in a note to clients. We expect further correction in this outlook and consequently expect the dollar to see some support on a 1-to-3-month view, Foley added, with the euro to drop as far as $1.05 on a three-month view as Germany’s economy falters.

U.S. core inflation is seen at 0.2% for the month and 3.8% YoY for December, its slowest since early 2021.

A 0.3% reading, Deutsche Bank’s Alan Ruskin points out, would “suggest some stalling out in the downward improvements” and decrease the urgency of cutting interest rates.

After gaining sharply on Wednesday the dollar dropped 0.3% to 145.39 yen, though the Japanese currency hit a six-month low of 159.99 per euro in early trade. Data on Wednesday showed Japanese workers’ real wages dropped for a 20th consecutive month in November – confounding officials’ wishes to see wage gains before tightening policy.

The weaker dollar helped China’s yuan off a one-month low to 7.1621 per dollar. South Korea’s central bank kept its policy rate unchanged for an eighth successive meeting, as expected, leaving the won slightly stronger at 1,315.8 per dollar.