Dollar in demand after weak Chinese activity data dent risk sentiment

Investing.com - The U.S. dollar gained in early European trading Wednesday after weak Chinese activity data hit risk sentiment, while the U.S. debt ceiling deal cleared an important hurdle.

At 03:55 ET (07:55 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, rose 0.2% to 104.300, just below the two-month high of 104.420 seen earlier in the week.

Data released earlier Wednesday showed that Chinese manufacturing activity shrank for a second consecutive month in May, and at a sharper pace than the prior month.

This weakness in the important manufacturing sector, which is a key driver of local growth, meant that overall growth in business activity in the world’s second-largest economy also contracted, hitting risk sentiment to the benefit of the safe haven dollar.

USD/CNY rose 0.3% to 7.0979, with the yuan falling to a six-month low after crossing the 7.1 level for the first time since late November.

The bill to suspend the $31.4 trillion U.S. debt ceiling advanced late Tuesday when the Republican-controlled House Rules Committee voted 7-6 to advance it to the floor of the House of Representatives for a vote on Wednesday.

This makes a disastrous U.S. default less likely, but could also embolden the Federal Reserve to continue raising interest rates as inflation remains elevated, further helping the dollar.

Federal Reserve Bank of Cleveland President Loretta Mester said on Wednesday, in an interview with the Financial Times, that she sees no "compelling" reason to wait to implement another interest rate hike.

Elsewhere, EUR/USD fell 0.5% to 1.0685 after the German state of North Rhine Westphalia, the most populous state in the country, recorded an annual inflation rate of 5.7% in May, considerably below the 6.8% expected and the revised prior number of 6.7%.

This news, coupled with Tuesday’s drop in Spanish consumer prices, support the European Central Bank officials who say the continent’s historic price spike is fading and interest-rate increases can soon end. 

The other German states are also due to release their CPI data later Wednesday, culminating in a national figure, along with French and Italian numbers, ahead of Thursday’s eurozone release.

GBP/USD fell 0.2% to 1.2384, following a 0.4% gain the previous day, while AUD/USD dropped 0.4% to 0.6494, with the Aussie dollar weighed by the weak Chinese PMI numbers even as Australian data showed consumer inflation moved back towards 30-year highs in April.

USD/JPY traded 0.2% lower to 139.47, having climbed as high as 140.93 in the previous session before a report indicated that Japanese officials "will closely watch currency market moves and respond appropriately as needed."