European Inflation Cools, Leading to Dollar's Highest Level Since Mid-March

US Dollar Surges to Two-Month High as European Inflation Cools and China's Recovery Stalls.

The US dollar experienced a significant rise on Wednesday, reaching a more than two-month high. This was influenced by European inflation cooling at a faster rate than anticipated and China's economic recovery showing signs of faltering. The euro dipped to $1.066, its lowest level since March 20, and the dollar index, measuring the greenback against six major currencies, climbed to 104.63, its highest level since March 16.

Data revealed that inflation in France and some of Germany's largest states is decelerating rapidly. Analysts suggest that these figures alleviate pressure on the European Central Bank (ECB) to continue raising interest rates, diminishing the attractiveness of the euro in comparison to the dollar. In France, May's inflation dropped to its lowest level in a year due to moderated energy and food prices. Eurozone-wide inflation data is expected to be released the following day.

Carl Hammer, chief strategist at European bank SEB, commented, "European inflation is rolling back now and you're taking back some of the previously anticipated hikes from the ECB." He also mentioned that the potential resolution of the US debt ceiling standoff is bolstering US stocks and likely supporting the dollar.

The weakening economic data from China also contributed to the strength of the US dollar. A survey unveiled on Wednesday showed that China's factory activity contracted at a faster pace than anticipated in May, indicating a stumbling recovery from COVID-19 lockdowns. As a result, China's yuan dropped to its lowest level against the dollar since November, while the Australian dollar reached its lowest point since mid-November.

Shusuke Yamada, chief FX and rates strategist at Bank of America in Tokyo, stated, "All else being equal, a weak China is a positive for the US dollar, and to some extent the yen, against the euro or the Aussie."

In addition, the Japanese yen experienced volatility against the dollar throughout the day. After reaching a six-month high of 140.93 on Tuesday, it initially declined sharply following remarks by Japan's top currency diplomat about monitoring market moves. However, it rebounded later and was last up 0.15% at 139.98 yen. Bart Wakabayashi, general manager at State Street in Tokyo, mentioned that the crucial threshold to watch is 150, with concerns about potential Japanese currency intervention if it surpasses 145.

Meanwhile, the British pound declined by 0.4% to $1.236, and the Turkish lira hit a record low of 20.75 per dollar after President Tayyip Erdogan's extended tenure in Sunday's election.

By fLEXI tEAM