The safe-haven U.S. dollar fell from a one week high on Wednesday amid increasing optimism for a loosening of China's COVID restrictions, although moves were muted ahead of a speech by Federal Reserve Chair Jerome Powell later in the day.
The risk-sensitive New Zealand and Aussie dollars rose, while the Chinese yuan hovered near a one-week peak.
The market is thinking that China is taking a softer stance than China reopening, and while I think that's a bit of a stretch, that's seeing the dollar get sold, said Bart Wakabayashi, branch manager at State Street in Tokyo.
He said that there was a back and forth between dollar selling and dollar strength, because earlier in the week, all we could talk about was hawkish Fedspeak.
The U.S. dollar index, which measures the dollar against six rivals, fell 0.13 per cent to 106.72 after reaching 106.9 in early Asian trading for the first time since Nov. 23.
The index has dropped to around 105.3 twice since the middle of the month, amid bets that the Fed would pivot from aggressive rate hikes after inflation showed signs that it may be close to a peak.
There is a 36.5 per cent chance that the Fed will slow to a half-point pace of rate rises on December 14, and there is a 33.5 per cent chance that there will be another 75 basis point hike.
New York Fed President John Williams stated on Monday that the central bank needs to press forward with rate rises, and St. Louis Fed President James Bullard said there was still a way to go for policy tightening.
The Fed is not happy with where inflation and employment are at the moment, according to State Street's Wakabayashi. Powell will continue to err on the side of hawkishness at this point in time. The dollar fell 0.07 percent to 138.60 yen after a bounce from a three month low of 137.50 on Monday.
The euro was higher by 0.11 per cent to $1.0339, from a one-week low earlier on Wednesday at $1.0319.
German and Spanish consumer price data came in weaker than expected on Tuesday, triggering a lowering of rate hike bets for the European Central Bank and shining a spotlight on Wednesday's euro zone inflation data.
The New Zealand dollar was up 0.29 per cent to $0.6218, while the Aussie added 0.1 per cent to $0.66935.
The Antipodean currency, which often function as proxy trades on China's economic outlook, shook off downward pressure from worse-than-expected Chinese manufacturing surveys.
In Australia, lower than forecast inflation data reduced the pressure for a tighter policy by the Reserve Bank next week.
The yuan fell slightly to 7.1418 per greenback in offshore trading.
China's health officials said on Tuesday they will speed up COVID- 19 vaccinations for the elderly, a key stumbling block in efforts to ease unpopular zero-COVID curbs, which had sparked protests in recent days.
In a client note, Kim Mundy, a strategist at Commonwealth Bank of Australia, wrote that China is ready to move from zero Covid to living with COVID.
Expectations for an end to China's zero covid policy in the coming months, coupled with more targeted restrictions in the meantime, can provide support to CNH, AUD and NZD.