Dollar Strengthens Amid U.S. CPI Anticipation and Global Central Bank Meetings

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CPI Anticipation

The U.S. dollar gained strength against major currencies on Wednesday, buoyed by expectations surrounding the upcoming U.S. Consumer Price Index (CPI) report and a Reuters report on China’s potential currency policy.

Key Market Movements

  1. Dollar vs. Euro and Pound:
    • The euro fell 0.1% to $1.0515 ahead of a European Central Bank (ECB) meeting.
    • The pound dropped 0.2% to $1.2747 as traders anticipated the U.S. inflation report, expected to show a 0.3% rise in both headline and core CPI for November.
  2. China and the Yuan:
    • A Reuters report suggested China might allow the yuan to weaken in 2025 to counter potential trade tariffs from a second Trump presidency.
    • The dollar rose slightly against both the offshore yuan (USDCNH) at 7.2662 (+0.1%) and the onshore yuan (USDCNY) at 7.2590 (+0.14%).
  3. Antipodean and Asian Currencies:
    • The Australian dollar (AUDUSD) dropped 0.26% to $0.6361, while the New Zealand dollar (NZDUSD) fell 0.34% to $0.5781, both touching yearly lows.
    • The Korean won (USDKRW) also weakened, reflecting concerns over regional currency pressures.
  4. Japanese Yen:
    • The yen weakened 0.43% to 152.63 per dollar (USDJPY) following a Bloomberg report suggesting the Bank of Japan (BOJ) may delay its next rate hike.
    • Earlier, the yen saw some strength as Japanese wholesale inflation data pointed toward a potential BOJ interest rate hike next week.
  5. Other Currency Moves:
    • The Canadian dollar (USDCAD) hovered near a 4.5-year low at C$1.4179 ahead of a Bank of Canada (BoC) meeting, with expectations of a 0.5% rate cut.
    • The Swiss franc firmed slightly against the euro at 0.9283 but remained steady against the dollar at 0.8833 francs.

Key Drivers and Commentary

  • U.S. CPI Data Anticipation:
    Market sentiment hinges on the CPI report due at 1330 GMT, which could influence expectations for a Federal Reserve rate cut. Traders currently assign an 85% probability to a December 18 cut, but stronger-than-expected inflation could challenge this narrative.
  • China’s Currency Strategy:
    Reports of a potential yuan devaluation reflect China’s economic strategy to counteract trade tariffs, which could add pressure on regional currencies and bolster the dollar’s “safe-haven” status.
  • Global Central Banks:
    • The ECB, Bank of Canada, and Swiss National Bank are all set to announce decisions this week, adding further volatility to currency markets.

Analyst Perspectives

  • Jane Foley, Head of FX Strategy at Rabobank, noted that the dollar’s strength reflects market concerns over a strong CPI report potentially altering the Fed’s easing path.
  • Ken Cheung of Mizuho highlighted the risks of a U.S.-China trade war escalating, which could weigh further on Asian currencies.

With multiple central bank decisions and critical economic data on the horizon, volatility is expected to persist. A strong U.S. CPI print or unexpected policy moves could significantly shift currency market dynamics in the coming days.

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