Weak U.S. business activity data released overnight spurred more bets that the Federal Reserve will have limited headroom to keep raising interest rates, ahead of the beginning of a two-day meeting on Tuesday.
The dollar fell in Asian trade, as a rebound from 15-month lows ran out of steam. The dollar index and dollar index futures both fell about 0.1% each on Tuesday.
The yuan jumped 0.4% on Tuesday, recovering sharply from the 7.2 level hit earlier this week. The currency was aided by a significantly stronger daily midpoint fix by the People’s Bank of China.
Media reports also suggested that Chinese state banks were once again selling dollars to support the yuan.
Sentiment towards China was elevated after officials from the Politburo – the Communist Party’s top decision-making body – vowed to step up stimulus efforts in order to support an economic recovery.
The body also flagged new efforts to stabilize the yuan, after the currency plummeted over 4% to the dollar this year.
But while stimulus measures bode well for the Chinese economy, increased liquidity could herald more pressure on the yuan, especially if the PBOC trims interest rates further.
Most other Asian currencies advanced on Tuesday. The Japanese yen rose 0.1% ahead of a Bank of Japan meeting later in the week, while the Indonesian rupiah was flat before a Bank Indonesia meeting later in the day.
The Australian dollar rose 0.3%, while the Indian rupee rose 0.1% to an over two-month high. The South Korean won rose 0.1% as data showed the country’s economy grew more than expected in the second quarter.
The Fed is widely expected to raise rates by 25 basis points at the conclusion of a two-day meeting on Wednesday. While the hike appears to be largely priced in by markets, traders remained uncertain over what the Fed may signal.
U.S. inflation still remains well above the central bank’s target range, which could see the Fed stick to its plan for at least one more hike this year after Wednesday’s move.
But Fed Fund futures prices show that markets are pricing in the chance that the bank will keep rates steady for the remainder of the year.
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