Dollar slides, yuan gains on China PMI; hot inflation lifts euro

By Samuel Indyk and Rae Wee

LONDON (Reuters) – The dollar slumped and China’s yuan gained on Wednesday after China’s manufacturing activity expanded at its fastest pace since April 2012, while the euro rose after regional German inflation data signalled price pressures remain high.

The Australian and New Zealand dollars were also among the beneficiaries of the robust Chinese data, which smashed expectations with the official manufacturing purchasing managers’ index (PMI) shooting up to 52.6 last month from 50.1 in January.

China’s non-manufacturing activity also grew at a faster pace in February, while the Caixin/S&P Global manufacturing PMI reading for last month likewise surpassed market expectations.

The onshore yuan finished the domestic session at 6.8854 per dollar, the strongest close since Feb. 21, while the offshore yuan jumped 1.3% to 6.8683 per dollar, set for its largest one-day gain since late November.

“The data confirms expectations that the growth outlook has improved quite significantly in China, so it’s positive for risk sentiment,” said Niels Christensen, chief analyst at Nordea.

“This has put the dollar on the defensive.”

The kiwi surged 1.3% to $0.6263, while the Aussie gained 0.7% to $0.6774, reversing the slide to a two-month low earlier on Wednesday following soft domestic economic data.

The antipodean currencies are often used as liquid proxies for the yuan.

Meanwhile, inflation data from five German states was largely unchanged in the high single digits in February, pointing to no let-up in stubborn price pressures at the national level.

Preliminary pan-German inflation data is to be published at 1300 GMT, calculated using data from up to 16 German states.

Figures released on Tuesday showed accelerating inflation in France and Spain, two of the euro zone’s biggest economies, pushing up expectations for rate hikes by the European Central Bank (ECB).

The euro was last up 0.9% against the dollar to $1.0672, on track for its biggest daily gain since Feb. 1.

“The euro is being well supported by the inflation data,” Nordea’s Christensen said.

“We’re looking for a more solid euro area inflation reading tomorrow than we had expected going into this week.”

Sterling rose 0.2% to $1.2049, although trimmed earlier gains after Bank of England governor Andrew Bailey said it was possible the central bank had already come to the end of its rate-rising cycle.

The pound surged 1% at the start of the week after Britain struck a post-Brexit Northern Ireland trade deal with the European Union.

Against a basket of currencies, the U.S. dollar index fell 0.7% to 104.25.

The index rose nearly 3% in February, its first monthly gain after a four-month losing streak, as a slew of strong U.S. economic data in recent weeks raised market expectations that the Federal Reserve has further to go in hiking rates.

Futures pricing currently suggests a peak of around 5.4% in the Fed funds rate by September.

“We see the Fed going to 5.5%, with a growing risk of 6%,” said Michael Every, global strategist at Rabobank. “The Fed is hiking. Others can’t follow or match. The dollar will soar.”

Elsewhere, the dollar fell 0.65% against the Japanese yen to 135.36, having spiked close to 5% against the yen in February, its largest monthly gain since last June.