The US dollar hit a one-month trading high against six major currencies on Wednesday, with the safe haven surging as sentiment was hit by weak Chinese data and experts who objected to an immediate tapering. On the other hand, sterling strengthened due to higher UK inflation.
The US dollar index hit a trade high of 103.58, its highest since December 13, extending its gains after a 0.67% jump on Tuesday. It ended up slightly higher for the day at 103.34.
The jump was driven in part by the Federal Reserve's Christopher Waller saying that the US is "close to" the Fed's 2% inflation target, the Fed should not rush to start cutting interest rates until it is clear that lower inflation will continue.
Market expectations for a rate cut in March have slipped to around 60% from about 75% in the previous session, according to CME's FedWatch Tool, and US bond yields have risen.
Also weighing on sentiment was mixed data showing China's economy growing 5.2% in 2023, slightly higher than the official target, but a much weaker recovery than many analysts and investors had expected.
Some of the December data released alongside GDP data was more bleak, showing the country's long-running real estate crisis deepening. This has implications for Asian and European stocks, and the broader market sentiment.
The dollar traded at its highest level since early December against the rate-sensitive Japanese yen, ending up 0.3% at 147.64, while the China-exposed Australian currency hit its lowest level since December 12 and ended up 0.3% at $0.6564. The dollar also hit a two-month high of 7.2282 against the Chinese yuan.
The euro traded at $1.0864, stabilizing after a 0.7% drop on Tuesday following Waller's remarks, while comments from European Central Bank policymakers also opposed rate cuts in Europe.
Sterling, on the other hand, strengthened 0.12% to $1.2651 against the US dollar, as rising British inflation data reinforced market expectations that the Bank of England will slow rates compared to other central banks.
The data "supports our view that although price growth is expected to slow faster than the BoE expects, continued economic resilience will prevent inflation from cooling at a rate that would allow rate cuts in the first half of the year," said Nick Rees, FX Markets Analyst at Monex Europe.
