Dollar Rises in View of CPI, Euro and Yuan Depreciate

The U.S. dollar strengthened on Wednesday, driven by anticipation of the November consumer inflation report. This pressure weighed on the euro and British pound, while the Chinese yuan retreated following reports that Beijing is considering measures to weaken its currency. The dollar index, which measures the greenback against a basket of six other major currencies, currencies, rose 0.3% to 106.410.

U.S. CPI in Focus

The dollar gained support from heightened demand as traders awaited inflation data that could provide signals on the Federal Reserve’s future interest rate trajectory. The report is expected to show a year-over-year increase of 2.7% in November, up from 2.6% in October, translating to a monthly rise of 0.3%. Core inflation, which excludes volatile items such as energy and food, is forecast to remain steady at 3.3% year-over-year, also with a 0.3% monthly increase.

“While it is tempting to say the Fed has moved past the inflation narrative, any upside surprise to the already elevated consensus of 0.3% monthly core inflation could drive the dollar higher,” ING analysts noted.

They added, “Markets currently assign an 88% probability to a 25 basis point Fed rate cut next Wednesday. However, an elevated core CPI reading could turn this into a 50% likelihood.”

Since September, the Fed has reduced rates by 75 basis points, and another 25 basis point cut is expected during its December 17-18 meeting.

Euro Loses Ground Ahead of ECB Meeting

In Europe, the EUR/USD pair declined 0.2% to 1.0501, ahead of the European Central Bank’s final policy meeting of the year, scheduled for Thursday. The ECB is widely expected to approve a 25 basis point rate cut, the fourth in 2024.

“It has been a relatively quiet week for European data, as investors focus on tomorrow’s ECB decision,” ING analysts noted.

While the 25 basis point rate cut appears priced in, analysts believe that discussions during the press conference could introduce the possibility of further cuts in 2025, adding downward pressure on the euro.

Meanwhile, GBP/USD slipped 0.3% to 1.2731, and USD/CHF edged 0.1% higher to 0.8841, with markets anticipating another Swiss National Bank rate cut, potentially by as much as 50 basis points, at its Thursday meeting.

China Considers Weakening the Yuan

In Asia, USD/CNY climbed 0.4% to 7.2809 after reports suggested that China is considering a weaker yuan in 2025 to counterbalance increased trade tariffs under a potential second Trump presidency. Market participants are also closely monitoring developments from China’s closed-door Central Economic Work Conference, held this week.

China has pledged to adopt more proactive fiscal stimulus measures and relatively accommodative monetary policies in 2025, aiming to bolster its economy amidst external pressures.

Yen Strengthens Amid Rising Inflation

USD/JPY rose 0.5% to 152.70 after Japan reported a third consecutive monthly increase in wholesale inflation for November, driven by rising labor and commodity costs. The data has fueled speculation about whether the Bank of Japan will raise interest rates again at its two-day monetary policy meeting concluding on December 19. Although the central bank has already raised rates twice this year to combat rising inflation and wages, recent slowdowns in both metrics have cast uncertainty on its next steps.