Economy

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$99 for your first yearFT newspaper delivered Monday-Saturday, plus FT Digital Edition delivered to your device Monday-Saturday.What’s included Weekday Print EditionFT WeekendFT Digital EditionGlobal news & analysisExpert opinionSpecial featuresExclusive FT analysis More

$99 for your first yearFT newspaper delivered Monday-Saturday, plus FT Digital Edition delivered to your device Monday-Saturday.What’s included Weekday Print EditionFT WeekendFT Digital EditionGlobal news & analysisExpert opinionSpecial featuresExclusive FT analysis More

$99 for your first yearFT newspaper delivered Monday-Saturday, plus FT Digital Edition delivered to your device Monday-Saturday.What’s included Weekday Print EditionFT WeekendFT Digital EditionGlobal news & analysisExpert opinionSpecial featuresExclusive FT analysis More

$99 for your first yearFT newspaper delivered Monday-Saturday, plus FT Digital Edition delivered to your device Monday-Saturday.What’s included Weekday Print EditionFT WeekendFT Digital EditionGlobal news & analysisExpert opinionSpecial featuresExclusive FT analysis More

$99 for your first yearFT newspaper delivered Monday-Saturday, plus FT Digital Edition delivered to your device Monday-Saturday.What’s included Weekday Print EditionFT WeekendFT Digital EditionGlobal news & analysisExpert opinionSpecial featuresExclusive FT analysis More

SINGAPORE (Reuters) – The dollar firmed on Monday as traders pondered the ramifications of U.S. President Donald Trump’s tariff plans at the start of a week where the Federal Reserve is widely expected to hold interest rates steady. The dollar clocked its weakest week since November 2023 last week on ebbing fears of tariffs from the Trump administration, but those worries resurfaced after he said he will impose sweeping measures on Colombia.The retaliatory moves, including tariffs and sanctions, comes after the South American country turned away two U.S. military aircraft with migrants being deported as part of the new U.S. administration’s immigration crackdown.That led to the Mexican peso, a barometer of tariff worries, sliding 0.8% to 20.426 per dollar in early trade. The Canadian dollar was a bit weaker at $1.43715.The euro was 0.14% lower at $1.0474 ahead of the European Central Bank policy meeting this week where the central bank is expected to lower borrowing costs. Sterling last fetched $1.24615. That left the dollar index, which measures the U.S. currency against six units, at 107.6, still close to the one-month low it touched last week. Investor focus this week will be on the central banks and how policymakers are likely to react after Trump said he wants the Federal Reserve to cut interest rates.The Fed is expected to keep rates unchanged when it concludes its two-day meeting on Wednesday, though investors will be watching for any clues that a rate cut could come in March if inflation continues to ease closer to the U.S. central bank’s 2% annual target.Data on Friday showed that U.S. business activity slowed to a ninth-month low in January amid rising price pressures, while separately U.S. existing home sales increased to a 10-month high in December.”Optimism has surged about Trump’s growth-friendly America First agenda, inflationary pressures have intensified to a four-month high, and businesses are taking on employees at the quickest pace since 2022,” said Kyle Chapman, FX markets analyst at Ballinger Group. “That picture is suggestive of a reheating labour market, and strongly supportive of an extended pause at the Fed.” In other currencies, the Australian and New Zealand dollars were slightly lower but remained closer to their one-month highs touched last week. The Australian markets are closed for the day. The Japanese yen strengthened nearly 0.4% to 155.41 per dollar in early trading after the Bank of Japan raised interest rates on Friday to their highest since the 2008 global financial crisis and revised up its inflation forecasts.BOJ Governor Kazuo Ueda said the central bank will keep raising interest rates as wage and price increases broaden but offered few clues on the timing and pace of future rate hikes.Mark Dowding, chief investment officer at RBC BlueBay Asset Management, said the renewed attention back on the Japan story could provide a catalyst for the yen to appreciate in the weeks ahead. “The Japanese currency remains extremely undervalued on most valuation models and, as interest rate differentials narrow, we think that this will help the yen perform better in 2025.” More

TOKYO (Reuters) – The Bank of Japan, after clearly signalling last week’s interest rate hike, may return to its accustomed fuzzy guidance about central bank policy to maintain flexibility when it eventually begins to consider how much tightening is enough.The BOJ fumbled its communication in December, surprising investors when it left rates steady, but then telegraphed Friday’s increase so unambiguously that markets had 90% priced it in and took the move in stride.That shift to clearer guidance, an approach the U.S. Federal Reserve used in August to signal a policy shift, may prove temporary. Japanese policymakers fear being led by the markets and are unsure how far the BOJ can raise rates without cooling growth, say analysts and people familiar with the central bank’s thinking.Policymakers are wary of feeling they must give clear signals before each meeting, given an uncertain economic outlook, and they lack conviction about the Goldilocks “neutral” interest rate that neither chills nor overheats the economy.After the BOJ caught markets off guard with December’s decision, Governor Kazuo Ueda flagged uncertainty over U.S. economic policy ahead of Donald Trump’s return as president as a key reason it had refrained from raising rates.Considered dovish, Ueda’s comments pushed down market pricing of January action to 46% from 70%.Keen to avoid startling markets again, the BOJ then laid the groundwork for the January hike, taking a page from Fed Chair Jerome Powell, who had explicitly signalled an imminent shift by pronouncing that “the time has come for policy to adjust”. COSTS OF CLARITYUeda and his deputy Ryozo Himino each said during the week before Friday’s hike that the BOJ board would “debate whether to raise rates” – effectively pre-announcing its decision to double short-term rates to 0.5%.”Without those comments, a January hike would have been a huge surprise,” said Naomi Muguruma, chief bond strategist at Mitsubishi UFJ (NYSE:MUFG) Morgan Stanley (NYSE:MS) Securities. “The BOJ probably had no other choice.”Asked about the advance warnings, Ueda said after Friday’s decision they were simply a “reminder” that the board would discuss the feasibility of changing policy at every rate review.But while the strategy let the BOJ smoothly raise its policy rate to the highest in 17 years, it is not without cost.Markets may focus too much on BOJ commentary, rather than scrutinising economic and price data, to gauge the bank’s next rate hike, analysts say.Giving explicit advance signals, in addition to making the BOJ feel boxed in, could breach Japanese law stipulating the nine-member board must debate and sign off on rate decisions at each policy meeting.”It raises some alarm bells,” a former policymaker said of the BOJ’s communication about Friday’s rate hike. “The market ought to be a guide for central banks on how the economy is doing. But if this practice continues, the BOJ will only see in the market a reflection of itself.”‘GREATER VARIABILITY’Another reason to revert to ambiguity is uncertainty over the end point for tightening.BOJ staff estimates Japan’s nominal neutral rate between 1% and 2.5%. While that has not been a factor so far with the policy rate so low, two more hikes would bring it to the bottom of that range – a level many analysts consider the neutral rate.Indeed, while signalling the bank’s resolve to keep raising interest rates, Ueda gave few clues on Friday of the pace or timing of further hikes and said it was hard to pin down Japan’s neutral rate in real time.”Because the BOJ doesn’t know where exactly the neutral rate is, it would have to wait about six months after each hike to check the health of the economy,” said Izuru Kato, chief economist at Totan Research. “Only after judging that the neutral rate is still distant would it raise rates again.”Other complications loom as the BOJ eyes further rate hikes, which could heighten challenges in trying to convince the public of the need to keep pushing up borrowing costs.The bank justified Friday’s increase by citing prospects of sustained wage gains, but it is uncertain whether consumption can weather rising living costs.Trump’s threats of higher tariffs could weigh on Japan’s export-reliant economy and business sentiment.”The BOJ’s hands are looking increasingly tied with the complex task of managing price pressures, reflation efforts and market expectations all together,” said Frederic Neumann, chief Asia economist at HSBC Bank, adding that risks surrounding Trump’s policy cannot be dismissed.”These all translate to greater variability as to the policy rate path going forward.” More