By Hannah Lang and Stefano Rebaudo
(Reuters) – The dollar rose on Tuesday ahead of U.S. inflation data that could offer clues about the Federal Reserve’s monetary-easing path, while analysts assess the likely impact of President-elect Donald Trump’s policies when he begins his second term.
The Australian dollar dropped sharply as the Reserve Bank of Australia softened its tone on the inflation outlook, while the rally sparked by China stimulus pledges tapered off after weak Chinese trade data.
Money markets are pricing an 86% chance of a 25-bps rate cut by the U.S. Federal Reserve next week, but some analysts warned that Fed hawks could have more weight in the upcoming decisions.
“The Fed’s consensus (median) will be to tilt the outlook in a more hawkish direction than in September or November,” said Thierry Wizman, global forex and rates strategist at Macquarie.
The U.S. dollar rose 0.5% to 151.980 yen. The dollar index, which measures the currency against the yen and five other major peers, rose 0.42% to 106.6.
Market participants see little action before a busy second half of the week with the U.S. data and European Central Bank policy meeting.
An ECB quarter-point cut is baked in, but investors will focus on the communication, which could provide clues about the central bank’s future moves.
The euro dropped 0.48% to $1.0503.
The Aussie fell 1.09% to $0.6371, a level that had not been seen since Aug. 5.
It rose 0.8% the previous day after China pledged an “appropriately loose” monetary policy next year.
“If we can get Chinese stocks to rally, China-sensitive commodities like copper to rally, that could depress the U.S. dollar a little bit,” said Erik Bregar, director of FX & precious metals risk management at Silver Gold Bull. “You can feel there’s a lot of pressure over there to do something.”
China’s exports grew at a slower pace in November, while imports unexpectedly shrank, affecting expectations for the Australian economy, as China is its largest trading partner.
Chinese equities eased gains while Hong Kong stocks declined as the initial optimism over Beijing’s policy shift faded.
The RBA held rates steady as expected, but noted the board had gained “some confidence” inflation was heading back to target.
“A full pricing-in (of a rate cut) over the next few weeks would weigh further on the Australian dollar,” said Volkmar Baur, forex strategist at Commerzbank (ETR:CBKG), recalling that two labour market reports and the inflation figures for the fourth quarter will be published before the next policy meeting in February.
The New Zealand dollar dropped in sympathy with the Aussie, declining 1.13% to $0.5799.
Investors will closely watch China’s closed-door Central Economic Work Conference this week, which sets key targets and policy intentions for next year.
The yuan was last at 7.2632 per dollar in offshore trading, supported by Monday’s surprise shift in Beijing’s monetary policy stance toward more easing to boost the ailing economy.
Elsewhere, the Bank of Canada and the Swiss National Bank decide policy on Wednesday and Thursday, respectively, with deep rate cuts expected from both.
Against Canada’s loonie, the U.S. dollar rose to its strongest level since April 2020 at C$1.4191.
This post is originally published on INVESTING.
