US dollar dips as China deflation pulls investors into risk assets

LONDON/NEW YORK, Aug 9 (Reuters) – Data showed the Chinese economy plunged into deflation last month, making it more likely that China will roll out more stimulus and lure investors into riskier assets. The dollar fell on Wednesday.

Dollar selling by China’s state-owned banks helped the yuan rise from a one-month low, dealers said. The People’s Bank of China pegged the exchange rate at 7.1588 yuan to the dollar, stronger than expected, before the opening, signaling the central bank’s displeasure with the recent depreciation of the yuan.

The yuan fell 0.2% against the yuan to 7.2246 yuan.

The Dollar Index, which shows the US currency’s performance against six other currencies, fell 0.2% to 102.30, reversing Tuesday’s gains.

The euro rose 0.2% to $1.0978 and the pound fell to $1.2735.

European markets rallied after stocks fell a day earlier after the Italian government announced an unexpected 40% windfall tax on banks.

Italy’s finance ministry later clarified that the one-off measures targeting interest rate hike profits for banks would not exceed 0.1% of total assets. However, the original decision stripped 3.5% of the shares (.SX7E) of major eurozone financial institutions.

In China, consumer prices fell for the first time in more than two years in July. Rather than boosting demand for the dollar as a safe-haven asset, the figures confirm the view that the Chinese government may take steps to support the economy with monetary stimulus.

“Risk aversion has receded sufficiently to dampen safe dollar buying,” said Joe Manimbo, senior market analyst at Convera. The time is ripe for confirmation,” he said. Washington.

“The market has embraced the hope that China’s economy will slow, forcing Beijing to step up its stimulus package, and that Italy will cut its windfall tax,” he added.

Investors are now eyeing Thursday’s US inflation data. The statistic has a big impact on markets seeking clues about the direction of Federal Reserve (Fed) policy.

Chris Scicluna, head of economic research at Daiwa Capital Markets, said the data is likely to be more significant to investors for now than the receding price pressure in China.

“Whether it’s the Fed, the ECB[European Central Bank]or the Bank of England, central bankers are concerned about service prices and tighter labor markets overall, and what’s to come will not change that.” It continues,” he pointed out.

There have also been more dovish signals from Fed officials overnight, with Philadelphia Fed President Patrick Harker suggesting rates are already high enough and Atlanta Fed President Rafael Bostic agreed with the view.

But the message is far from uniform, with Fed Governor Michelle Bowman saying on Monday that another rate hike is likely.

Money markets indicate that most traders do not expect the Fed to make any changes at its September policy meeting. The odds of a quarter-point rise are just 13.5%, according to derivatives markets.

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Currency bid price at 10:06 am (14:06 GMT)

Reporting by Amanda Cooper in London and Gertrude Chavez-Dreyfus in New York. Additional reporting by Kevin Backlund and Brigid Riley of Tokyo.Editing: Margherita Choi and Kirsten Donovan

Our criteria: Thomson Reuters Trust Principles.