Dollar Stumbles Ahead of Inflation Data, Yuan Slips on Rate Cut

In anticipation of the release of U.S. inflation data, the dollar experienced a modest decline on Tuesday, while China's yuan weakened to a six-month low after the central bank implemented a reduction in short-term lending rates to bolster the economy.

The euro saw a 0.37% uptick, reaching $1.079 on Tuesday, briefly touching its highest point since May 23 during the session at $1.081.

This development contributed to a 0.26% drop in the dollar index, which gauges the currency against six major counterparts, bringing it to 103.32.

Scheduled for 1230 GMT (8:30 a.m. ET), the release of U.S. consumer price inflation (CPI) data could potentially sway the Federal Reserve's decision on interest rates during its two-day policy meeting, culminating on Wednesday.

Jane Foley, the head of FX strategy at Rabobank, explained that the dollar's decline was due in part to market expectations of a potential pause from the Fed in their upcoming meeting.

While the Fed raised its target rate range to 5% to 5.25% in May, traders currently believe there is a 77% likelihood of the Fed maintaining stability this week. Traders generally anticipate a 25 basis points hike in July after Fed officials hinted at a possible pause.

Foley added, "Today's focus will be on the CPI, particularly the core number, as it will shape market expectations ahead of the Fed's meeting."

In Asia, China's yuan declined to a six-month low following the central bank's decision to decrease the short-term lending rate. This marks the first reduction in 10 months and aims to restore market confidence and support the country's recovery from the pandemic-induced economic slowdown.

The onshore yuan reached its lowest level since last November, hitting 7.168 per dollar before trading at 7.152.

The offshore yuan also weakened, touching a new six-month low of 7.178 before making a slight recovery.

Julian Evans-Pritchard, head of China economics at consultancy Capital Economics, noted that the rate cut reflects policymakers' increasing concerns regarding China's recovery and is expected to be accompanied by broader easing measures.

Following better-than-expected employment data, with a sharp increase in wages that fueled concerns about inflation, the sterling saw a significant surge on Tuesday.

The pound rose by 0.46% to $1.257, as traders speculated that the Bank of England might need to raise interest rates beyond previous expectations. However, it remained below Monday's one-month peak of $1.26.

Against the Japanese yen, the dollar experienced a marginal decline, reaching 139.57.

The Bank of Japan is scheduled to announce its monetary policy decision on Friday, and it is anticipated to maintain its ultra-dovish stance and yield curve control settings.

The Australian dollar climbed over 0.4% to reach its highest level since May 11 at $0.679 and was last trading at $0.678.

Also Read: US Dollar Struggles as Unemployment Claims Surge; Market Anticipates Fed's Next Move