Dollar sluggish as Fed rate hike worries recede; optimism is boosted by China’s reopening

TraningTwist, SINGAPORE, January 10 – On Tuesday, the U.S. dollar remained close to a seven-month low against other major currencies as demand for riskier assets increased due to China’s reopening and investors took heart that the Federal Reserve may be reaching the end of its rate-hike cycle.

The consequences of the Fed’s strong rate hikes from the previous year have already been felt by the markets, making it less likely that the Fed will need to raise interest rates over 5% to reduce inflation. Investors currently predict that rates will peak at little around 5% by June.

The U.S. economy generated jobs at a respectable rate in December, according to last week’s employment report, but wage growth slowed down.

The euro was recently trading 0.07% higher at $1.0739, maintaining close to the session’s seven-month high of $1.07605 that was fueled by the weakening dollar.

After reaching a three-week high of $1.2209 on Monday and finishing the session 0.73% higher, sterling declined 0.08% to $1.21705.

The U.S. dollar index decreased 0.03% to 103.14 when measured against a basket of currencies after falling 0.7% and reaching a seven-month low of 102.93 the previous session.

According to George Saravelos, head of foreign exchange research at Deutsche Bank, “the dollar’s dramatic trip down has started.”

The quick reopening of China’s borders after pandemic restrictions gave riskier assets another lift away from the safe haven appeal of the dollar. In the previous session, the risk-sensitive Australian dollar spiked at a more than four-month high of $0.6950. It last moved up 0.03% to $0.69155.

In close proximity to Monday’s almost three-week high of $0.6411, the New Zealand dollar increased by 0.13% to $0.6378. The two antarctic currencies are frequently utilised as liquid substitutes for the yuan in China.

The offshore yuan recently traded at 6.7755 to the dollar, having earlier in the day reached an almost five-month high of 6.7590.

Following China’s full reopening, hedge fund managers have become marginally pessimistic on the dollar, according to Tareck Horchani, Maybank Securities’ head of prime brokerage dealing.

In other news, the Japanese yen rose by 0.1% to 131.73 per dollar, helped by a falling dollar and a late-year surprise change in the yield curve policy made by the Bank of Japan (BOJ).

Dong Chen, head of Asia macroeconomic analysis at Pictet Wealth Management, told reporters at an outlook briefing: “What the BOJ did towards the end of 2022 only implies that Mr. Kuroda is attempting to make the work easy for his successor.” Haruhiko Kuroda, the governor of the BOJ, will retire in April.

After supporters of former president Jair Bolsonaro invaded the capital in the previous session, the Brazilian real ended its three-day winning streak and last traded at 5.2546 to the dollar. As of Tuesday morning in Asia, it hadn’t yet traded.

Investors’ focus will now shift to a speech by Fed Chair Jerome Powell later on Tuesday and to inflation statistics released by the US on Thursday, which could provide more insight into the forecast for the Fed’s course of rate hikes.

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