China’s yuan sagged to a 6-1/2-month trough, continuing its slide after the central bank cut rates on Tuesday, amid speculation even more stimulus is on the way to support the sputtering post-Covid economic recovery.
The dollar index – which measures the currency against six major peers, including the euro and sterling – was little changed at 103.29 in early Asian trading, after dipping to the lowest since May 22 overnight at 103.04.
The US consumer price index (CPI) edged up just 0.1% last month and notched its smallest year-on-year increase since March 2021 at 4.0%.
That saw bets for a quarter-point hike to US rates later on Wednesday pared to less than 6% currently, from 21% 24 hours earlier, according to the CME Group’s FedWatch Tool.
“The soft inflation report effectively cements a Fed pause, although I doubt it will be enough to warrant a dovish undertone as it’s not in their interest with CPI twice the Fed’s target,” said Matt Simpson, senior market analyst at City Index, who points to 103 as a key support level for the dollar index.
“Whilst it was enough to send EUR/USD above 1.0800, it wasn’t enough to keep it there given a hawkish pause seems quite likely.”
The euro was little changed at 1.0791, after reaching a high of US$1.08235 on Tuesday. The European Central Bank decides policy on Thursday, with a quarter-point rate hike widely expected.
Sterling edged 0.08% lower to US$1.2602, but after soaring 0.8% in the prior session and hitting the highest since May 11 at US$1.2625.
The dollar eased 0.16% to 140.02 yen. It rose to the highest since June 5 on Tuesday despite the soft US inflation figures, with the Bank of Japan seen retaining ultra-easy policy settings on Friday.
The Australian dollar was flat at US$0.6768, after reaching the highest since May 10 on Tuesday at US$0.6807.
The Aussie garnered additional support from the People’s Bank of China’s decision to cut the seven-day reverse repo rate for the first time in 10 months on Tuesday. China is a key destination for Australia’s resource exports.
The next adjustment to rates could come as soon as Thursday when the central bank is due to roll over 200 billion yuan (US$27.93 billion) in medium-term lending facility (MLF) loans.
The yuan weakened slightly and touched 7.1785 per dollar in offshore trading for the first time since Nov 29.