The dollar strengthened against European currencies on Wednesday ahead of the highly anticipated U.S. inflation report, also supported by a Reuters report that China is considering allowing its currency to weaken next year, which led to declines in the yuan and other Asian currencies.
The euro dropped 0.18% to $1.0508, a day before the European Central Bank’s meeting, while the pound fell 0.16% to $1.2752 as traders awaited U.S. CPI data, set for release at 1330 GMT.
Economists predict that both headline and core consumer prices will rise by 0.3% in November, compared to previous increases of 0.2% and 0.3%, respectively.
Traders are currently assigning an 85% probability to a quarter-point rate cut by the Fed on December 18, but a stronger-than-expected CPI print could disrupt these expectations, which is helping to support the dollar on Wednesday.
“The market is concerned about what might happen if the CPI report comes in stronger than expected, potentially removing some of the Fed’s easing expectations, which would be supportive for the dollar,” said Jane Foley, head of FX strategy at Rabobank in London.
She also noted that the dollar was impacted by a Reuters report suggesting that China’s top policymakers are considering allowing the yuan to weaken in 2025, anticipating higher trade tariffs if Donald Trump were to secure a second presidency.
The most significant moves were observed in Asia, where the dollar rose 0.24% against the offshore yuan to 7.2780 and gained 0.23% on the onshore yuan to 7.2491. The potential move reflects China’s acknowledgment that it needs a more significant economic stimulus to counter the threat of higher tariffs from Trump, according to people familiar with the matter, as reported.
China is expected to hold its annual Central Economic Work Conference this week, following Monday’s Politburo meeting, which pledged to implement an “appropriately loose” monetary policy to boost economic growth.
“If currency depreciation is used as a strategy to counter tariff shocks, an escalating trade war could reinforce the exceptionalism of the U.S. dollar and weigh on regional currencies,” said Ken Cheung, FX strategist at Mizuho.
Antipodean currencies sensitive to China’s economy fell, with the Australian dollar down 0.3% at $0.6358 and the New Zealand dollar 0.3% lower at $0.578, both hitting yearly lows after the report. South Korea’s struggling won also declined.
Japan’s yen attracted attention as well, strengthening after data showed Japanese wholesale inflation picked up, bolstering the case for an interest rate hike by the Bank of Japan next week.
The dollar was last down 0.3% at 151.49 yen.
“The data is pointing towards a rate hike,” said Bart Wakabayashi, co-branch manager at State Street in Tokyo. “If they raise rates, it’s a very defendable position.”
At the same time, Wakabayashi noted, “we’ve seen consistently strong economic numbers from the U.S.”
“All the reasons we bought the dollar in the first place still hold,” he said. “If you ask me whether I think we’ll see 145 or 155 yen per dollar, I’d say 155.” In other central bank news, the Bank of Canada will meet later on Wednesday, while the Swiss National Bank will hold its meeting on Thursday, just before the ECB’s.
The BoC is expected to cut rates by half a point, which is keeping the Canadian dollar near a 4-and-a-half-year low against the U.S. dollar. One U.S. dollar is currently worth C$1.4188.
The Swiss franc remained steady against the euro at 0.9289, but weakened against the strengthening dollar, which gained 0.15% to 0.8842 against the franc.
