Markets React as China cuts Rates: Dollar Falls Ahead of US Inflation Data and Fed Meeting

Published 13.06.2023 09:36

Dollar falls as China cuts borrowing rates

The US dollar weakened at the start of trading in Europe on Tuesday, lifting sentiment in riskier assets after China cut short-term borrowing rates. However, upcoming US inflation data and the Federal Reserve’s monetary policy meeting have added to uncertainty.

By 09:15 AM ET (0915 GMT), the dollar index, which tracks the currency against a basket of six other major currencies, was down 0.3% at 102.888, hitting levels last seen in mid-May.

Chinese yuan falls after rate cut

The yuan posted a 0.1% rise to 7.1548, hitting a six-month low after the People’s Bank of China cut its seven-day inverse repo rate by 10 basis points from 2.00% to 1.90%, its first such cut since August 2022. This has been seen as a sign that Chinese authorities intend to maintain a loose monetary policy to boost the country’s weak recovery from the financial crisis, boosting confidence in risky assets globally at the expense of the dollar, which is considered a safe haven.

US inflation points to a Fed pause

Attention has now turned to the latest US report, to be released on Tuesday, which is expected to show that inflation cooled slightly in May and could therefore give the United States room to pause its aggressive rate hike cycle when it announces its decision on Wednesday.

Analysts expect prices to rise 4.1% in May, slowing from 4.9% in April, but prices excluding volatile food and energy prices are likely to rise 5.3% for the year, compared to the previously recorded figure of 5.5%.

PIMCO weighs on the dollar

The dollar may face difficulties in rising much in the near future, if the investment manager PIMCO’s view is widely held.

“There is no guarantee that we are going to be short the dollar all the time, but today, (in) positionings, we are underweights of the dollar against the G10 and EM (emerging markets),” said Andrew Balls, the director of asset manager stock investments who oversee assets of $1.8 trillion.

“My opinion is that, on average, that is what we will have for the next two years.”

Euro advances ahead of ECB decision

The euro rose by 0.3% to the level of 1.0793 after confirming it reached 6.1% annually in May. This represents a drop in the annual rate from 7.2% the previous month, but it is unlikely to stop the European Central Bank from raising interest rates again by 25 basis points on Thursday.

On the other hand, the pair rose 0.4% to the 1.2563 level, and those responsible for the price pointed to further interest rate hikes if the price remains high.

“It is important that we continue to support inflationary momentum risks and therefore that further interest rate hikes cannot be ruled out,” wrote Jonathan Haskel, head of monetary policy at the Bank of England, in a column published on Monday.

The pair was down at the 139.53 level as all indications suggest the US will maintain its ultra-loose monetary policy this week. Meanwhile, the highly risk-sensitive pair rose 0.3% to 0.6774.