Dollar retreats, yuan soars after strong Chinese industrial activity data

By Peter Nurse 

Investing.com - The US dollar retreated in Europe Wednesday while the Chinese yuan rose sharply after economic data pointed to a recovery in the second largest economy in the world, sparking risk-on sentiment.

At 02:55 ET (07:55 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.2% lower at 104.672.

Data released earlier Wednesday showed that China's manufacturing activity expanded at the fastest pace in more than a decade in February, confirming that the economic recovery in China gained momentum over the past month after the country relaxed most of its anti-COVID measures in January.

China's manufacturing Purchasing Managers' Index rose 52.6 in February, a climb from January's figure of 50.1. The non-manufacturing PMI also gained in February, to 56.3, well above than the prior month's reading of 54.4. 

Strength in both manufacturing and non-manufacturing activity saw China's composite PMI jump 56.4 in February - its fastest pace in over three years.

USD/CNY fell 0.5% to 6.9010, moving further away from its lowest level this year, while NZD/USD rose 0.8% to 0.6233 and AUD/USD climbed 0.5% to 0.6760, with these antipodean currencies often used as liquid proxies for the yuan.

Elsewhere, EUR/USD rose 0.4% to 1.0614, boosted by the risk-on sentiment ahead of the release of the manufacturing PMIs for the Eurozone, Germany and France later in the day.

Inflation data from the German region of North Rhine-Westphalia, the country's industrial heartland, rose 1.0% on the month in January, an annual gain of 8.5%.

This, coupled with hotter than expected numbers from both France and Spain on Tuesday, suggests that the European Central Bank will continue lifting interest rates for months to come.

GBP/USD also rose 0.4% to 1.2073, retaining some strength after surging 1% at the start of the week after Britain struck a post-Brexit Northern Ireland trade deal with the European Union.

However, dollar losses are likely to be limited as economic data has tended to paint a picture of a resilient US economy with sticky inflation, suggesting more Federal Reserve hikes to come.

"This week's key data releases will be the ISM surveys, and in particular Friday's ISM services index, which served as a benchmark for the rapid swings in US growth sentiment over the past two prints," said analysts at ING, in a note.