Forex
Dollar little changed after CPI; China considers letting yuan weaken
By Hannah Lang and Alun John
NEW YORK/LONDON (Reuters) -The dollar was little changed on Wednesday after U.S. price data came in line with forecasts, reinforcing expectations the U.S. Federal Reserve will cut interest rates next week.
The dollar was also boosted by a Reuters report China was considering allowing a weaker currency next year, which sent the yuan and other Asian currencies lower.
The consumer price index rose 0.3% last month, the largest gain since April after advancing 0.2% for four straight months, data showed on Wednesday. Economists polled by Reuters had forecast the index would rise 0.3%.
Following the report, the likelihood of a quarter-point rate cut by the Fed on Dec. 18 rose to 96.4%, according to CME’s FedWatch tool.
“The market is as confident as possible, practically, that the Fed is still going to cut rates next week,” said Marc Chandler, chief market strategist at Bannockburn Forex in New York. “Very rarely does the Federal Reserve go against the market when such strong odds are priced in.”
The was last up 0.141% at 106.5.
Analysts said the dollar was also being affected by Reuters’ report that China’s top leaders and policymakers are considering allowing the yuan to weaken in 2025 as they brace for higher trade tariffs under a second Donald Trump presidency.
The dollar jumped against the yuan, but gave back some of its earlier gains and was last up 0.18% against the offshore unit at 7.2747.
The contemplated move reflects China’s recognition that it needs bigger economic stimulus to combat Trump’s threat of bigger tariffs, people with knowledge of the matter said, according to the report.
China is expected to hold its annual Central Economic Work Conference this week, after Monday’s Politburo meeting vowed to switch to an “appropriately loose” monetary policy to spur economic growth.
“If a currency depreciation served as a tactic to counter tariff shock, the likely escalating trade war could reinforce (U.S. dollar) exceptionalism and weigh on regional currencies,” said Ken Cheung, FX strategist at Mizuho (NYSE:).
China-exposed currencies fell, with the last down 0.25% to $0.6362 and the 0.18% lower at $0.579, after both touched on year lows after the report. Korea’s under-fire won also dipped.
Japan’s yen was in focus after Bloomberg news reported the BOJ sees “little cost” to waiting for the next rate hike.
The dollar was last 0.19% higher at 152.25 yen.
Earlier in the day the yen strengthened after data showed Japanese wholesale inflation accelerated, supporting the case for a Bank of Japan interest-rate hike next week.
“The data is leaning towards a hike,” said Bart Wakabayashi, co-branch manager at State Street (NYSE:) in Tokyo. “Put it this way: if they raise, it’s a very defendable position.”
In a busy week for monetary policy, the Bank of Canada meets later Wednesday and the European Central Bank and Swiss National Bank meet on Thursday.
Expectations Canada’s central bank will cut rates by a half point helped to pin the near a 4-1/2-year low against the greenback. One U.S. dollar last bought C$1.4174.
The euro was down 0.13% at $1.0514, while the Swiss franc was down 0.07% against the dollar at 0.8822.
Investing.com – The US dollar has gained strongly since the US presidential election in November, but these gains are unlikely to limit the hit that US customers are likely to face from tariffs, according to UBS.
At 08:25 ET (13:25 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.2% lower to 108.950, but was around 1.5% higher over the last month, and remained not far from the more than two-year high seen last week.
The theory is that a stronger dollar lowers US import prices, said analysts at UBS, in a note dated Jan. 17. Those lower prices would partially offset the tax payments US consumers must make to the US Treasury when buying imports.
If the US paid for the Chinese imports, then a stronger dollar would automatically reduce the amount of dollars paid (fewer dollars are exchanged to pay the renminbi price). However, the US pays for practically all its imports in dollars, so this does not happen.
If the dollar strengthens, the dollar price is unchanged, unless the exporter consciously chooses to lower the dollar price of the goods sold, UBS added.
An exporter to the US might deliberately lower dollar prices, as (in dollar terms) local currency costs are lower. But local currency costs are only a fraction of a manufacturer’s costs.
“A Chinese electronics manufacturer, importing chips (bought in dollars) and exporting computers to the US (in dollars), will probably keep their dollar prices stable—ignoring currency moves,” UBS added.
The US dollar strengthened against China’s renminbi in 2016 and 2018/19, and US import price inflation for products from China showed no noticeable break with earlier trends.
The preference seems to have been to reroute supply chains as a way of avoiding trade taxes.
Investing.com – The US dollar slumped Monday following a report that indicated that President-elect Donald Trump was set to delay imposing trade tariffs immediately upon his inauguration, an expectation which had boosted the US currency following his November election victory.
At 09:20 ET (14:20 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 1.1% lower to 108.020, having climbed to a more than two-year high last week.
The Wall Street Journal reported Monday that Trump is planning to issue a broad memorandum on his inauguration that directs federal agencies to study trade policies and evaluate US trade relationships with China and America’s continental neighbors—but stops short of imposing new tariffs on his first day in office.
The memo, which the WSJ has seen, suggests that debates are still ongoing within the incoming administration over how to deliver on Trump’s campaign trail promises for hefty tariffs on imports from trade rivals such as China.
The dollar has gained around 4% since the November presidential election as traders anticipated Trump’s policies will be inflationary, necessitating higher interest rates for a longer period.
“Financial markets are on tenterhooks to see what executive orders newly elected US President Donald Trump will enact on his first day,” said analysts at ING, in a note.
“FX markets are most interested in what he has to say about tariffs and what kind of pain the Oval Office plans to inflict on major trade partners.”
Bank of America (BofA) noted a significant increase in repo rates during the week of January 13 due to heightened liquidity demand triggered by tax payments and limited funding provided by the People’s Bank of China (PBoC).
The liquidity squeeze was most noticeable on January 16, the day following the tax payment deadline, with DR007 and R007 reaching 2.34% and 4.19%, respectively.
The PBoC maintained its stance on defending the exchange rate stability, resulting in the tightness of (RMB) liquidity being felt in the offshore market as well.
On January 9, the central bank announced it would issue RMB60 billion of 6-month bills in Hong Kong, a significant increase compared to previous issuances. The coupon rate of 3.4% was notably higher than the December issuance, reflecting the tightness of CNH liquidity and subdued demand from investors.
The December FX settlement balance by banks’ clients fell further to a deficit of US$10.5 billion, the first deficit reading since July 2024. A key change from the previous month was a sharp increase in USD demand for service trade. Reports also suggest that domestic importers have been actively purchasing USD via FX forward to hedge against tariffs risk in recent weeks, which has been exerting upward pressure on forward points.
On January 13, the PBoC increased the cross-border macroprudential parameter to 1.75 from 1.50. This move allows domestic corporations and Financial Institutions (FIs) to conduct more cross-border borrowing.
Given the widened interest rate gap between China and overseas, BofA believes this is more of a symbolic move by the PBoC to anchor market’s expectation on FX.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.
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