After a difficult week, the dollar fell across the board on Monday, dropping to below 7 yuan as investors' attitudes toward riskier, non-dollar assets improved as a result of indications that China may be loosening some COVID-related restrictions.
"It may seem like they are baby steps but nonetheless quite a strong sign of China taking calibrated steps in the direction of reopening," Christopher Wong, a currency strategist at OCBC said.
As China tries to ease its stance on COVID-19 restrictions in the aftermath of massive protests against the program, more Chinese cities, including the financial center Shanghai and Urumqi in the far west, announced an easing of coronavirus bans over the weekend. China is about to announce a statewide relaxation of testing criteria as well as the provision of limited home isolation for positive cases and close contacts.
While the onshore yuan increased by around 1.4% to reach a high of 6.9507 on Monday morning, its strongest since Sept. 13, the dollar fell below 7.0 yuan in offshore trade. The dollar index, which compares the value of the dollar to six important currencies, including the yen and the euro, fell 0.18 percent to 104.28, the lowest level since June 28.
Due to growing anticipation that the Federal Reserve may slow the pace of its interest rate hikes after four straight 75 basis point increases, the index dropped 1.4% last week, culminating in a 5% decline for the whole month of November, its worst month since 2010. The U.S. consumer price inflation report, which is expected out on December 13-the day before the Fed's two-day policy meeting ends-will be the subject of investors' attention.
At the meeting, the U.S. central bank is anticipated to raise interest rates by an extra 50 basis points. OCBC's Wong noted that some degree of caution is still necessary as the Fed is not done tightening and that Fed funds futures traders are now pricing in for the Fed's benchmark rate to peak at 4.92 percent in May. The only difference is that they will tighten in modest steps rather than all at once.
After several Fed speakers allayed market concerns on Friday, traders seemed to ignore the stronger-than-expected November US payrolls figure. According to Chris Weston, head of research at Pepperstone, "we move past U.S. payrolls with only a momentary shake for risky markets," and that the data supports the 'soft landing' argument and is unlikely to modify the Fed's policy.
