Dollar falls as more Chinese cities ease COVID restrictions

SINGAPORE The dollar fell as traders moved into riskier assets after more Chinese cities relaxed some of their COVID related restrictions, stoking hopes of a reopening of the world's second biggest economy.

Financial hubs in Shanghai and Urumqi in the far west were among the cities that have announced an easing of coronaviruses curbs over the weekend after protests against the government's uncompromising zero-COVID strategy.

Christopher Wong, a currency strategist at OCBC in Singapore, said that they are baby steps but nonetheless a strong sign that China is taking calibrated steps in the direction of reopening.

People familiar with the matter told Reuters last week that China is about to announce a nationwide easing of testing requirements and allowing positive cases and close contacts to isolate at home under certain conditions.

The dollar weakened below 7.0 yuan in offshore trade, while the onshore yuan went up about 1.4 per cent to as high as 6.9507 on Monday morning, its strongest since Sept. 13.

The dollar index, which measures the currency against six major peers, was down 0.268 per cent at 104.19, its lowest since June 28.

The index fell by 1.4 per cent last week and 5 per cent in November, making it its worst month since 2010. The Federal Reserve is going to dial down its pace of interest rate hikes after four consecutive 75 basis points increases, which has largely resulted in the recent bearishness toward the dollar.

Investors will focus on consumer price inflation data due out on December 13, one day before the Fed ends its two-day policy meeting.

The U.S. central bank is expected to increase policy rates by an additional 50 basis points at the meeting. The Fed funds futures traders are pricing for the Fed's benchmark rate to peak at 4.92 per cent in May.

OCBC's Wong said that some degree of caution is still warranted as the Fed is not doing tightening. They're still tightening, but it's going to be in small steps. The Japanese yen gained 3.5 per cent against the dollar last week, well off October's low of 151.94, as it weakened 0.20 per cent against the dollar, to 134.59 per dollar.

As the spotlight has been on the drawbacks of prolonged monetary easing policy and ahead of a Bank of Japan leadership transition when Governor Haruhiko Kuroda ends his second term, the yen's ascend comes at a time when he is regarded as a policty dove.

The BOJ should review its monetary policy framework and tweak its massive stimulus programme depending on the outcome, board member Naoki Tamura told the Asahi daily.

You got a case of not only the Fed slowing its pace of policy tightening, but you also have the case of potential BOJ unwinding, maybe very early in the day, some of its very accommodative policy, said Wong.

There is still room for the dollar to test lower due to the two forces coming from both sides of the dollar yen. The euro went up 0.32 per cent to $1.0572, having gained 1.3 per cent last week. It had reached a five month high of $1.05835 earlier in the day.

The pound rose to $1.23450, its highest since June 17, and was last trading at $1.2327, up 0.33 per cent on the day.

The Australian dollar was up 0.59 per cent at $0.683, while the kiwi was 0.31 per cent higher at $0.643.