Dollar drops as commodity currencies gain on China optimism; euro rises on hot inflation

New York, March 2 (BNA): The US dollar fell across the board on Wednesday, weighed down by firmer commodity currencies that benefited from strong manufacturing activity data in China, as well as gains in the euro after German inflation picked up last month and soared higher. Expectations of a rate hike in the eurozone.

Along with the Australian and New Zealand dollars, the Chinese yuan rose after data showed Chinese manufacturing activity expanded at its fastest pace in a decade, dashing expectations. The official manufacturing PMI rose to 52.6 last month from 50.1 in January.

Non-manufacturing activity in China also grew at a faster pace in February, and last month’s global Caixin/S&P manufacturing PMI reading beat market expectations, Reuters reported.

“The market is really responding to some other data outside of the US,” said Amo Sahota, CEO of San Francisco-based FX advisory firm Klarity FX.

“It was notable today that some commodity currencies outperformed. The market is reading the Chinese PMI data. This was a very strong report and shows that China is back with a retaliation,” he added.

The euro was the other outperformer, rising 0.8% to $1,066, supported by the German inflation report. Traders said there was a large option expiring Friday at $1.07 in the euro, suggesting further room for bullish gains in the single European currency.

German consumer prices, coordinated to compare with other EU countries, rose more than expected and fueled expectations of a rate hike by the European Central Bank after data indicated stubborn cost pressures were not being let down.

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“The German inflation reading supports expectations that the ECB will do something more here and that helps the euro,” said Klarity’s Sahota.

Figures released on Tuesday showed inflation accelerating in France and Spain, two of the eurozone’s largest economies.

Against a basket of currencies, the dollar index fell 0.5% to 104.42.

The dollar also added to losses after data showed US manufacturing activity contracted for the fourth consecutive month in February. The ISM manufacturing PMI rose to 47.7 last month from 47.4 in January, the first rise in six months. A PMI reading below 50 indicates a contraction in manufacturing.

The dollar index rose nearly 3% in February, its first monthly gain after a four-month losing streak, as a string of strong US economic data in recent weeks raised market expectations that the Federal Reserve should continue to raise interest rates.

Futures prices continue to rise, with Wednesday’s peak rate rising to 5.46% in federal funds by September.

Elsewhere, the dollar settled against the Japanese yen at 136.20 yen, after the greenback rose nearly 5% in February, its biggest monthly gain since June.

The internal yuan ended the local session at 6.8729 against the dollar, the strongest close since February 21, while the external yuan jumped 1.1 to 6.8779 against the dollar, notching its biggest one-day gain since late November.

The New Zealand dollar rose 1% to $0.6248, while the Australian dollar rose 0.4% to $0.6752, reversing a slide to a two-month low earlier Wednesday after weak domestic economic data.

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The two currencies are often used as liquid proxies for the yuan.

Sterling traded little changed on the day at $1.2016, after Bank of England Governor Andrew Bailey said it was likely the central bank had already reached the end of its rate hike cycle.


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