Dollar just below new one-month high; yuan gains despite rate cut

Investing.com - The U.S. dollar edged lower in early European trade Tuesday, but remained near recent highs, while the Chinese yuan saw volatile trading after the country's central bank unexpectedly cut key policy rates.

At 02:00 ET (06:00 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% lower at 102.982, after hitting a 1-1/2-month high at 103.46 late Monday.

Dollar in demand, yuan volatile after Chinese rate cut, data

The dollar had strengthened in the wake of the release of a number of disappointing Chinese economic indicators that raised concerns about global growth, prompting demand for the safe-haven greenback.

Before the release of the Chinese data, the People’s Bank of China surprised with the decision to cut key interest rates for the second time in three months.

“The market was expecting the PBoC to wait until September before easing again, and today's cuts suggest that the authorities' concern about the state of the macroeconomy is mounting,” said analysts at ING, in a note.

This concern is understandable as July industrial output grew 3.7% from a year earlier, slowing from the 4.4% pace seen in June, and July retail sales rose 2.5%, down from a 3.1% increase the prior month, adding to concerns about a faltering post-pandemic recovery in the world's second-biggest economy.

USD/CNY fell 0.4% to 7.2336 in volatile trading having climbed as high as 7.3115 for the first time since Nov. 4, with major state-owned banks reported selling dollars to support the Chinese currency.

U.S. retail sales due

The dollar has been in demand of late on concerns that sticky inflation will prompt the Federal Reserve to keep interest rates higher for longer than traders had previously expected.

The latest U.S. retail sales data is due later Tuesday and could add to the debate. So far the U.S. consumer has been resilient even in the face of rising rates, and more strength could further boost the dollar.

As could the continued U.S. political turmoil, with former U.S. President Donald Trump hit with more criminal charges as a Georgia grand jury issued an indictment late Monday accusing him of trying to overturn his 2020 election loss to Democrat Joe Biden.

U.K. unemployment rate rises

GBP/USD rose 0.2% to 1.2710 after the release of the latest U.K. employment data, showing the country’s unemployment rate climbed to 4.2% in June, while the claimant count rose 29,000 in July, suggesting the country’s labor market is starting to feel the heat of the prolonged tightening cycle.

USD/JPY traded largely unchanged at 145.49, just off the nine-month high of 145.60 reached earlier in the session. The dollar's surge above 145 late last year triggered intervention by Japanese officials, and traders are now looking for something similar as they try to stem the yen’s decline.

EUR/USD rose 0.1% to 1.0910 ahead of the release of the latest German ZEW economic sentiment index, which is expected to show that confidence in the eurozone’s largest economy remains weak.

The German economy has been hit by a toxic mix of weak trading with key partner China and a slump in its large manufacturing and construction sectors, threatening to push the eurozone economy into a recession.