The U.S. dollar gained ground on Tuesday as investors anticipated inflation data that could provide insights into the Federal Reserve’s future monetary policy. Meanwhile, the Australian dollar fell sharply following weaker Chinese trade figures and a softer inflation outlook from the Reserve Bank of Australia (RBA).
After initially rallying on promises of stimulus from China, the Australian dollar’s momentum faded, dropping 0.93% to $0.6381, its lowest level since August. The currency had risen 0.8% the previous day but lost steam after China’s trade data revealed slowing export growth and a surprising contraction in imports, dampening optimism for the Australian economy, which is heavily tied to Chinese demand.
Market participants are closely watching for the release of the U.S. Consumer Price Index (CPI) data, expected on Wednesday. This report could influence expectations for a December interest rate decision, which is already priced at near certainty for a 25 basis point rate cut.
Brad Bechtel, global head of FX at Jefferies, noted that a stronger than expected CPI reading might prompt the market to adjust its outlook for the Federal Reserve. “The market is nervous about a higher CPI print, which could lead to a more hawkish stance from the Fed,” he said.
The U.S. dollar index, which tracks the currency against a basket of major peers, rose 0.23% to 106.4. Against the yen, the dollar climbed 0.47% to 151.925 yen. The euro also dipped 0.27%, trading at $1.0526, ahead of the European Central Bank’s policy meeting later this week, where investors anticipate a quarter-point rate cut.
In Australia, the RBA held its interest rates steady as expected but expressed greater confidence that inflation was returning to target levels. However, analysts warn that if market participants fully price in a February rate cut, it could exert further downward pressure on the Australian dollar. Upcoming labor market and inflation data will likely play a significant role in shaping expectations ahead of the RBA’s next policy meeting.
The New Zealand dollar also declined in tandem with the Aussie, falling 1.1% to $0.5801. Both currencies are seen as sensitive to shifts in Chinese economic policy and performance.
China’s exports slowed in November, while imports contracted unexpectedly, reflecting ongoing challenges for the world’s second-largest economy. Although Beijing recently announced plans for a more accommodative monetary policy, market enthusiasm waned as the initial optimism over these measures faded. Chinese equities pulled back, with Hong Kong stocks following suit.
Elsewhere, the U.S. dollar strengthened against the Canadian dollar, reaching its highest level since April 2020 at C$1.4165, ahead of the Bank of Canada’s policy announcement. The Swiss National Bank is also set to make a policy decision this week, with both central banks expected to make substantial rate cuts.
Investors are keeping a close eye on China’s Central Economic Work Conference, which will set key policy priorities for the upcoming year. The yuan held steady at 7.2602 per dollar in offshore markets, buoyed by Beijing’s surprise monetary policy shift on Monday aimed at stimulating the economy.
