Dollar edges higher, euro falls after weak German economic data

Investing.com - The U.S. dollar rose in early European trade Tuesday, rebounding after slipping from its 3-week high overnight, while weak German economic data weighed on the euro.

At 03:45 ET (08:45 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% higher at 102.067, after falling from three-week highs in the prior session, as uncertainty over rate cuts in 2024 spurred some profit-taking. 

Dollar off three-week high after dovish Fedspeak

The dollar posted gains of around 1% last week as doubts started to emerge over whether the Federal Reserve will begin cutting interest rates as early as the first quarter of 2024.

However, it drifted lower on Monday following relatively dovish Fedspeak, with Governor Michelle Bowman calling monetary policy "sufficiently restrictive" and Atlanta Fed President Raphael Bostic repeating his view that rate cuts are likely this year.

Additionally, the New York Fed's latest Survey of Consumer Expectations showed that U.S. consumers' projection of inflation over the short run fell to the lowest level in nearly three years in December.

Thursday's U.S. CPI remains the week’s key focus, as it is likely to determine future expectations of the Fed’s interest rate moves.

Euro dips on weak German economic data

In Europe, EUR/USD traded 0.1% lower at 1.0945, after data showed that German industrial production unexpectedly fell by 0.7% in November on a month-on-month basis, marking the sixth monthly decline in a row.

The European Central Bank has tried to make the case for keeping interest rates at record highs for some time, but is likely to come under pressure to ease monetary policy given the weakness of the German economy, Europe's biggest. 

Eurozone inflation jumped to 2.9% in December from 2.4% in November, data showed on Friday. But this was widely expected, and growth in the region remains difficult to find.

GBP/USD fell 0.1% to 1.2733, with traders looking ahead to Friday’s release of GDP data for November for further guidance.

Japanese inflation drops

Elsewhere, USD/JPY traded 0.1% lower to 144.09, after data showed inflation in Tokyo fell closer to the Bank of Japan’s 2% annual target range in December. The BOJ has signaled that it will begin tightening its ultra-dovish policy only after the 2% target is achieved.

USD/CNY rose 0.1% to 7.1595, as sentiment towards China remained weak. Inflation data due this Friday is expected to show a continued deflationary trend in the country, while trade data is likely to show sustained weakness in its export engines.