Dollar hits one-week high on caution ahead of central bank meetings

By Geoffrey Smith -- The dollar hit its highest level in a week in early trading in Europe on Tuesday, as markets worldwide dialed down their risk appetite ahead of some big central bank meetings over the next couple of days.

By 03:00 ET (08:00 GMT), the dollar index, which tracks the greenback against a handful of advanced economy currencies, was up at 102.06, having earlier hit a high of 102.19.

Markets have had an upbeat start to the year, pushing the dollar down and higher yielders up as investors look through the current high inflation rates worldwide to focus on the prospect of possible interest rate cuts later this year. However, that impulse has run out of steam in the last 24 hours, with weak European data, in particular, challenging the narrative of a soft landing and an early turn in the policy cycle.

German retail sales data for December, released earlier, were considerably weaker than expected, falling -5.3% on the month in real terms, and went some way to explaining why GDP in Europe's largest economy fell 0.2% in the final quarter of the year. French consumer spending also fell 1.3% on the month, further illustrating the pressures on Europe's consumers, although the French economy overall eked out a gain of 0.1% on the quarter.

The euro was largely unmoved, however, losing less than 0.1% to $1.0840.

The Eurozone publishes CPI data for December on Wednesday, but Pantheon Macroeconomics' Claus Vistesen warned that the numbers will "have to be taken with a pinch of salt" given that Germany has delayed publishing its own figures due to technical problems. French consumer prices rose a little less than expected, providing some relief after Spanish and Belgian inflation data on Monday sparked fears of a round of upside surprises across the Eurozone.

Elsewhere, the pound drifted lower after the International Monetary Fund warned that the U.K. would be the only one of the G7 economies to contract this year. U.K. lending data are due from the Bank of England at 04:30 ET.

The IMF's winter update was otherwise upbeat, raising the Fund's growth forecasts for the first time in a year, reflecting the reopening of the Chinese economy.

The reopening boost was in evidence overnight as the official Chinese composite purchasing managers' index rocketed back into growth territory, hitting a seven-month high of 52.9. Both the manufacturing and services sub-indices rose back above the key 50 threshold that typically indicates growth.

The offshore yuan was steady at 6.7581 to the dollar.

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