LONDON The dollar fell broadly on Wednesday, losing ground against commodities like the Australian dollar and against the euro, which got a lift from a raft of data that suggested European inflation may finally have peaked.
The dollar was under pressure from investors who are more optimistic about the possibility that China's relaxation of COVID restrictions will breathe life into the world's second largest economy.
On Wednesday, French consumer price pressures cooled by a lot more than expected in December, while German data showed that inflation fell significantly more than forecast. Last week, Spanish inflation data painted a similar picture, which came hot on the heels of this.
The euro went up by as much as 0.82 per cent on Tuesday as traders latched on to the idea that softer inflation could mean a change in the pace of the European Central Bank, which posted its largest one-day drop against the dollar in two months. The economy will take less of a knock, as it may be suggested by this.
Business sector activity in the euro zone held up better than expected in December despite the soaring energy prices.
Michael Brown, TraderX market analyst, said that the recent inflation figures in the euro zone are coming down faster than expected, because we're only a day and a half into the trading year.
The ECB sounded an unusually hawkish note in December, indicating it may lift rates by another 150 basis points in rapid succession.
Brown said Wednesday's macro data cast doubt on this. That is the big story markets are latching onto, he said.
The euro was up 0.6 per cent against the dollar at $1.0611 and up 0.3 per cent against the yen at 138.53.
The Australian dollar, which surged as much as 2.3 per cent higher against its U.S. counterpart, was boosted by optimism over China and the Chinese government is discussing a possible removal of a ban on coal imports, a major Australian export.
The Aussie was last up 2.1 per cent at $0.6868, which is its largest one-day gain in almost two months. The New Zealand dollar rose 1.56 per cent to $0.6345.
The offshore yuan rose by 0.51 per cent against the dollar to 6.8887, its strongest for over four months.
State media in China pledged a final victory over the epidemic, and boosted market bets that China's relaxation of rules and reopening was irreversible.
The yen gained 0.4 per cent to hold around 130.45 against the dollar, while the sterling rose 0.7 per cent to $1.2048.
The Federal Reserve's most recent policy meeting gave investors minutes of the Federal Reserve's most recent policy meeting to look for any additional clues as to where interest rates might go, although monthly employment figures on Friday will likely have more weight for the market.
David Stritch, a currency analyst at CaxtonFX, said that the minutes' content is easier to estimate than the market reaction, with the prevailing narrative surrounding the U.S. being so pessimistic.