Dollar rises from three-month low and euro falls as inflation falls

The U.S. dollar rose slightly on Wednesday after falling to its lowest level in more than three months on hopes the Federal Reserve will cut rates soon, while the euro fell as data showed European inflation fell in November.

Comments by Fed official Christopher Waller about a possible rate cut in the coming months sent U.S. bond yields and the dollar tumbling Tuesday.

"(Waller) is relatively hawkish, judging by history, so if his attitude becomes a little more dovish, it kind of suggests that maybe the general consensus among board members is that rates have peaked and maybe even could be cut next year," said Kyle Rodda, senior financial markets analyst at Capital.com.

 

The dollar index, which tracks the currency against six other currencies, hit its lowest level since early August at 102.46 in the Asian trading session.

It then rebounded slightly and was last up 0.18% to 102.8. The dollar fell 3.7% in November, its biggest monthly drop in a year.

"This was essentially on the back of a rally in U.S. and global bonds, particularly 10-year U.S. Treasuries," said Alvin Tan, head of Asia currency strategy at RBC Capital Markets.

The yield on 10-year U.S. Treasuries fell 5 basis points (bps) on Tuesday and fell the same amount on Wednesday to 4.2898%, the lowest level since mid-September.

 

Yields move inversely to prices, and lower bond yields make investing in the fixed-income country less attractive relative to peers, which has an impact on the local currency.

On Tuesday, the euro briefly crossed $1.10 for the first time since August, but then faltered and was last down 0.1 percent to $1.0984.

Inflation data in Germany, Europe's largest economy, showed price growth slowed to an annualized 2.3% in November from 3% in October. Inflation in Spain also slowed sharply.

"On an intraday basis, (the euro) has pulled back from the high ... but of course, on the flip side, U.S. bond yields continue to fall," Tan said. "There are two contrasting forces at work here."

 

Eurozone inflation data is due on Thursday, before the Fed's preferred gauge of U.S. inflation, the Personal Consumption Expenditures, or PCE, index, is released.

The New Zealand dollar was last up 0.34% to $0.6157 after the Reserve Bank of New Zealand left interest rates unchanged on Wednesday but warned that further policy tightening may be needed.

Earlier in the session, the kiwi rose more than 1% to hit a four-month high of $0.6207.

 

The Japanese yen, which is particularly sensitive to U.S. bond yields, held recent gains on Wednesday. The dollar rose 0.1% to 147.55 after earlier falling to a more than two-month low of 146.68 yen.

China's onshore yuan ended the domestic session at 7.1246 per dollar, the strongest closing price since June 16.