Dollar Falls as Commodity Currencies Increase Due to China Optimism; Euro Gains Due to High Inflation
The firmer commodity currencies that benefited from China's strong manufacturing activity data, as well as gains in the euro after German inflation soared last month and raised rate hike expectations in the eurozone weighed down the U.S. dollar on Wednesday.
China's yuan increased along with the Australian and New Zealand dollars after statistics revealed that manufacturing activity in China expanded at its fastest rate in a decade, exceeding expectations. The official manufacturing purchasing managers' index (PMI) increased sharply from 50.1 in January to 52.6 last month.
Additionally, China's non-manufacturing activity expanded more quickly in February, and the Caixin/S&P Global manufacturing PMI reading for the previous month was higher than anticipated by the market. Amo Sahota, executive director at FX advisory firm Klarity FX in San Francisco, observed that "the market is responding to some of the other data outside the U.S.
"The outperformance in some commodity currencies today was noteworthy. The market is interpreting the data from the China PMI. That was a very compelling report that depicts China returning with a vengeance "Added he. The euro also performed well, rising 0.8% to $1.066 on the strength of the German inflation report.
There is a sizable option expiry in the euro on Friday at $1.07, according to traders, indicating that the single European currency still has room to rise. German consumer prices increased more than expected and raised expectations for an ECB rate hike after the data showed no sign of a slowdown in persistent cost pressures.
These prices were harmonized to compare with those of other European Union nations. The euro is benefiting from expectations that the ECB will act more strongly in Germany, according to Sahota of Klarity. Two of the largest economies in the eurozone France and Spain, both had rising inflation according to data released on Tuesday.
The dollar index dropped to 104.42 against a basket of currencies, a decrease of 0.5%. After data revealed that U.S. manufacturing activity declined for a fourth consecutive month in February, the dollar further increased its losses. Manufacturing PMI for ISM increased marginally to 47.7 in February from 47.4 in January, marking the first increase in six months.
Manufacturing contraction is indicated by a PMI reading below 50. Following a four-month losing streak, the dollar index gained nearly 3% in February as the market anticipated the Federal Reserve would continue to raise interest rates based on a slew of positive economic data coming out of the United States. Futures pricing has been rising steadily, reaching a peak rate in the fed funds on Wednesday of 5.46%.
Other than that, the dollar was unchanged at 136.20 yen against the Japanese yen after the U.S. currency gained nearly 5% in February, its largest monthly gain since June. The offshore yuan jumped 1.1 to 6.8779 per dollar, set for its largest one-day gain since late November, while the onshore yuan increased to 6.8729 per dollar, the strongest close since February 21.
The Australian dollar increased 0.4% to US$0.6752, reversing the earlier Wednesday declined to a two-month low due to weak domestic economic data, while the New Zealand dollar increased 1% to US$0.6248.
They are frequently used as liquid substitutes for the yuan. After Bank of England Governor Andrew Bailey suggested that the central bank may have already reached the end of its rate-rising cycle, the pound fluctuated little throughout the day at $1.2016.