Dollar languishes as Fed rate hike fears recede; China reopening boosts optimism

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By Rae Wee

SINGAPORE (Reuters) - The U.S. dollar languished near a seven-month low against other major currencies on Tuesday, as investors took heart that the Federal Reserve may be nearing the end of its rate-hike cycle and as China's reopening drove demand for riskier assets.

Markets have grown increasingly doubtful that the Fed will have to take interest rates above 5% to cool inflation, as effects of it aggressive rate increases last year have already been felt in the economy. Investors are now expecting rates to peak just under 5% by June.

Last week's jobs report showed that while the U.S. economy had added jobs at a solid clip in December, it had also recorded a slowdown in wage growth.

The dollar's decline pushed the euro to a seven-month peak of $1.07605 in the previous session. The euro was last 0.04% lower at $1.0728.

Sterling slipped 0.03% to $1.2177, after similarly hitting a three-week top of $1.2209 on Monday and ending the session 0.73% higher.

Against a basket of currencies, the U.S. dollar index edged 0.04% higher to 103.21, after tumbling 0.7% and touching a seven-month low of 102.93 in the previous session.

"The dollar's big climb down has begun," said George Saravelos, head of FX research at Deutsche Bank (ETR:DBKGn).

China's rapid reopening also provided another boost towards riskier assets away from the safe haven greenback, with the risk-sensitive Aussie spiking to a more than four-month peak of $0.6950 in the previous session. It was last 0.04% lower at $0.6911.

The kiwi steadied at $0.6373, not far off Monday's more than three-week high of $0.6411. Both antipodean currencies are often used as liquid proxies for the Chinese yuan.

The offshore yuan last bought 6.7757 per dollar, and was edging towards the previous session's near five-month top of 6.7665 per dollar.

"Hedge funds managers have turned slightly bearish USD following the full reopening in China," said Tareck Horchani, head of head of prime brokerage dealing at Maybank Securities.

Elsewhere, the Japanese yen rose roughly 0.1% to 131.73 per dollar, still supported by a weakening greenback and the Bank of Japan's surprise tweak to its yield curve policy late last year.

"What the BOJ did at the end of 2022 just indicates that Mr Kuroda is trying to make the job easier for his successor," Dong Chen, head of Asia macroeconomic research at Pictet Wealth Management, told reporters at an outlook briefing. Haruhiko Kuroda, governor of the Bank of Japan, will step down in April.

Brazil's real snapped its three-day winning run in the previous session and last stood at 5.2546 per dollar, having fallen more than 1% on Monday after supporters of former President Jair Bolsonaro stormed the capital. It had yet to trade as of Asia hours on Tuesday.

Investors will turn their attention to a speech by Fed Chair Jerome Powell later on Tuesday and to U.S. inflation data out on Thursday, which could give further clarity on the outlook of the Fed's rate-hike path.