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Dollar eases, upbeat China PMI revives risk sentiment

SING`ORE, Mar 1 (Reuters) – The dollar surged on Wednesday after China’s manufacturing activity expanded at the fastest pace since April 2012, beating forecasts, sparking some risk appetite that sent the safe-haven dollar lower.

The yuan and Australian dollar gained momentum on upbeat economic data out of China, which showed the official purchasing managers’ index (PMI) for manufacturing last month came in at 52.6 versus 50.1 in January.

Similarly, China’s non-manufacturing activity grew faster in February, official data showed, while last month’s Caixin/S&P Global Manufacturing PMI reads also beat market expectations.

The onshore yuan was higher, up around 0.1% to 6.9250 per dollar, while the offshore yuan is up 0.26% to 6.9371 per dollar.

“Strong China PMIs have breathed some life into China’s reopened trade,” said Christopher Wong, currency strategist at OCBC.

The Aussie, which fell to a two-month low earlier Wednesday after weak domestic economic data, also reversed losses following Chinese polls, and was last up 0.07% at $0.6733.

The Australian Dollar is often used as a liquid proxy for the Yuan.

Australia’s economy grew at its weakest pace in a year in the last quarter, while the country’s monthly consumer prices rose less-than-expected in January, separate data showed on Wednesday, suggesting a slower pace of rate hikes by the Reserve Bank of Australia.

“I think market participants will be watching January’s CPI indicator closely to gauge the short-term outlook for RBA policy,” said Carol Kong, currency strategist at the Commonwealth Bank of Australia (CBA).

“But based on what the RBA said at the last meeting, they seem to have already made up their minds and want to keep raising interest rates.”

The US dollar fell across the board on Wednesday as markets cheered the revival of activity in the world’s second largest economy after China’s exit from its tough COVID policy late last year.

This raised hopes of a more muted downturn in the global economy as major central banks aggressively hiked interest rates.

The euro rose 0.09% to $1.0586, recouping some of its losses from the previous session.

Inflation in two of the euro zone’s largest economies unexpectedly rose in February, data showed on Tuesday, boosting interest rate hike expectations from the European Central Bank (ECB).

“While still-high US inflation predicts further Fed tightening, eurozone inflation is higher and tougher in 2023 and the ECB has more tightening ahead of it than the Fed,” said Thierry Wizman, global FX and rates strategist by Macquarie.

Sterling rose 0.12% to $1.2032 after rising 1% earlier in the week after Britain secured a post-Brexit trade deal with Northern Ireland with the European Union.

British Prime Minister Rishi Sunak was in Northern Ireland and then met with his own lawmakers on Tuesday to sell the new deal.

Against a basket of currencies, the US Dollar Index fell 0.07% to 104.91.

It was up nearly 3% in February, the first monthly gain after a four-month losing streak, as a string of strong US economic data in recent weeks raised market expectations that the Federal Reserve may need to hike further rates.

Futures prices are currently pointing to a peak of around 5.4% of the fed funds rate by September.

“We see the Fed going up to 5.5% with a growing risk of 6%,” said Michael Every, global strategist at Rabobank. “The Fed is hiking. Others cannot follow or keep up. The dollar will rise.”

Elsewhere, the dollar rose 0.06% against the Japanese yen to 136.31 after rising nearly 5% against the yen in February, its biggest monthly gain since last June.

The kiwi rose 0.17% to $0.6195.

Reporting by Rae Wee; Editing by Jacqueline Wong

Our standards: The Thomson Reuters Trust Principles.

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