US dollar falls as Europe’s inflation cools and China lifts the Aussie

THE US dollar fell on Wednesday (Jan 4), losing out to commodities currencies like the Australian dollar and against the euro, which got a lift from a raft of data that suggested European inflation may finally have peaked.

The US dollar was already under pressure from investors who have grown more optimistic over the prospect that China’s relaxation of tough Covid restrictions will breathe life into the world’s second largest economy.

Data on Wednesday showed French consumer price pressures cooled by a lot more than expected in December, while the previous day German data also showed inflation fell significantly more than forecast. Spanish inflation data last week painted a similar picture.

The euro, which on Tuesday posted its largest one-day drop against the US dollar in two months, zipped up by as much as 0.82 per cent, as traders latched on to the idea that softer inflation might mean a change in pace from the European Central Bank (ECB). This in turn might suggest the economy will take less of a knock.

A series of separate reports showed business sector activity across the eurozone held up better than expected in December, despite intense pressure from soaring energy prices.

“We’re a day and a half into the trading year, so we can’t read too much into it, but the recent inflation figures in the eurozone are coming down more quickly than expected,” TraderX market analyst Michael Brown said.

The ECB in December sounded an unusually hawkish note, indicating it may lift rates by another 150 basis points in rapid succession.

Wednesday’s macro data has cast some doubt on this, Brown said. “That’s the big story markets are latching onto,” he said.

The euro was last up 0.5 per cent against the US dollar at US$1.0603 and up 0.3 per cent against the yen at 138.55.

The standout performer on Wednesday was the Australian dollar, which roared as much as 2.3 per cent higher against its US counterpart, on a combination of optimism over China and following media reports that Beijing is discussing a possible removal of a ban on coal imports from Australia.

The Aussie was last up 2 per cent at US$0.6864, set for its largest one-day gain in almost two months. The New Zealand dollar rose 1.1 per cent to US$0.6315.

The offshore yuan rose 0.47 per cent against the US dollar to 6.891, near its strongest for over four months.

State media in China pledged a “final victory” over the pandemic, boosting market bets that China’s relaxation of rules and reopening was irreversible.

The yen gained 0.3 per cent to around 130.66 against the US dollar, while sterling rose 0.7 per cent to US$1.2056.

Later in the day, investors will scour minutes from the Federal Reserve’s most recent policy meeting for any additional clues as to where interest rates might head, although monthly employment figures on Friday will likely have more weight for the market.

“The content of the minutes is easier to estimate than the market reaction, with the prevailing narrative surrounding the US being so pessimistic most of the risk seems skewed to further US dollar weakness,” David Stritch, a currency analyst at CaxtonFX, said. REUTERS