Dollar hits more than two-month high as European inflation cools

A picture illustration shows U.S. 100 dollar bank notes taken in Tokyo. REUTERS/Yuriko Nakao

By Harry Robertson and Kevin Buckland

LONDON/TOKYO (Reuters) – The U.S. dollar rose strongly on Wednesday to a more than two-month high after data showed European inflation is cooling quicker than expected and China’s recovery is sputtering.

The euro was last down 0.67% at $1.066, the lowest since March 20.

That helped the dollar index, which measures the greenback against six major peers, climbed 0.51% to 104.6, its highest since March 16.

Data on Wednesday showed that inflation in France and some of Germany’s biggest states is slowing quickly. Analysts said the figures reduced the pressure on the European Central Bank (ECB) to keep raising interest rates, diminishing the euro’s attractiveness relative to the dollar.

READ MORE: Dollar drifts as traders weigh rocky path for US debt ceiling deal

In France, inflation cooled in May to its lowest level in a year as energy and food price increases moderated. Eurozone-wide inflation data is due out tomorrow.

“European inflation is rolling back now and you’re taking back some of the previously anticipated hikes from the ECB,” said Carl Hammer, chief strategist at European bank SEB.

Hammer also said the probable resolution of the U.S. debt ceiling standoff was supporting U.S. stocks and likely helping the dollar.

Weak economic data out of China also boosted the U.S. currency, analysts said. A survey released on Wednesday showed that China’s factory activity shrank faster than expected in May, in the latest sign that the country’s recovery from COVID-19 lockdowns is faltering.

The data weighed heavily on the Australian and New Zealand dollars.

Australia’s dollar fell to its lowest since mid-November at $0.648. Meanwhile, China’s yuan also fell to its lowest since November at 7.129 per dollar.

“All else being equal, a weak China is a positive for the U.S. dollar, and to some extent the yen, against the euro or the Aussie,” said Shusuke Yamada, chief FX and rates strategist at Bank of America in Tokyo.

On a busy day in currency markets, the Japanese yen bounced around against the dollar.

READ MORE: Oil falls as weak China data offsets US debt ceiling progress

The dollar rose to a six-month peak of 140.93 on Tuesday but then fell sharply after Japan’s top currency diplomat said officials “will closely watch currency market moves and respond appropriately as needed”.

It initially continued that fall on Wednesday but was last up very slightly at 139.83 yen.

“I think the real line in the sand is 150,” said Bart Wakabayashi, general manager at State Street in Tokyo.

“If we get above 145, we’re going to see pretty much every Japanese official on the wires trying to talk it down, and if they don’t like what they see, they’re going to act,” he said, referring to the risk of currency intervention.

Sterling was last down 0.42% to $1.236.

The Turkish lira sank to a record low of 20.75 per dollar after President Tayyip Erdogan extended his two decades in power in elections on Sunday.

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