Dollar stabilizes, yuan dips as traders assess inflation implications.

The dollar found its feet on Thursday while the Chinese yuan dipped to a two-month low after more evidence of weakness in China’s post-Covid recovery clouded the outlook for the global economy.

The U.S. currency had started the day on the back foot, sliding against the yen under the weight of lower U.S. Treasury yields as slowing U.S. inflation bolstered confidence that the Federal Reserve was done hiking interest rates.

But it pared those declines and erased losses against the Aussie dollar and euro following the release of Chinese data showing consumer inflation almost flat-lined last month, after an unexpected decline in imports earlier in the week had already raised a red flag.

The onshore yuan slipped as low as 6.9366.

Sterling edged down 0.32% to $1.2583, retreating from Wednesday’s one-year high of $1.2679. The Bank of England releases its policy decision later on Thursday, and is poised for a 12th straight rate hike.

“The market is trying to assess which economy is going to slow down quicker, and is undecided how to read the latest data,” said Rodrigo Catril, senior FX strategist at National Australia Bank.

“U.S. CPI was encouraging, and should be dollar negative, but China CPI is a reminder of the ongoing issues there.”

The dollar was 0.16% lower at 134.13 yen, after earlier dropping as much as 0.37% to 133.895.

The 10-year Treasury yield, which the dollar-yen pair tends to track, earlier slipped to 3.425%, extending an 8 basis point decline from overnight, after headline U.S. CPI printed below 5% for the first time in two years. It was last little changed at 3.4364%.

“Yesterday’s CPI was a bit of a relief, and we do expect that the Fed is now finished hiking,” said Shinichiro Kadota, senior FX strategist at Barclays in Tokyo.

“That’ll weigh on dollar-yen,” with the pair potentially weakening to as low as 130 in the near term, Kadota said.

Money market traders currently lay only 5% odds on a quarter point hike in June, and a 95% probability of a pause. Three quarter point cuts are priced by the end of this year.

The dollar index — which measures the greenback against a basket of six major peers, including the yen, euro and sterling — edged 0.34% higher to 101.82.

Source: CNBC