Dollar recovers as investors digest China's loosening of COVID rules

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By Hannah Lang and Amanda Cooper

WASHINGTON/LONDON (Reuters) - The dollar pared losses on Tuesday after China said it would scrap its COVID-19 quarantine rule for inbound travellers - a major step in reopening its borders that boosted risk-related currencies such as the Australian dollar.

China will stop requiring arriving travellers to go into quarantine starting Jan. 8, the National Health Commission said on Monday, even as COVID cases spike. At the same time, Beijing downgraded regulations for managing COVID cases to the lighter Category B from the top-level Category A.

The Aussie rose 0.22% versus the greenback to $0.674 in mostly thin trading during the year-end holiday season, while the New Zealand dollar gave up earlier gains, easing by 0.14% to $0.629. The two currencies are often used as liquid proxies for the Chinese yuan.

The offshore yuan fell 0.12% to 6.9661 per dollar.

"We've been in a very narrow trading range, and I think with the dollar firming up against the euro and yen, we could see further dollar gains against the Chinese currency," said Marc Chandler, chief market strategist at Bannockburn Global Forex.

Still, investors could be cheered by what some perceive to be "Chinese policymakers' resolve to full reopening", said Christopher Wong, a currency strategist at OCBC.

"There seems to be no let-up in the pace of relaxing COVID restrictions despite the surge in COVID cases in the mainland."

Elsewhere, the euro fell 0.08% against the dollar to $1.0626.

China's gradual dismantling of its economically-damaging zero-COVID policies may give the euro - which has clawed higher thanks to the European Central Bank taking a much harder line on inflation than investors had expected - an additional boost.

With UK markets closed for a public holiday, trading in sterling was muted, leaving the pound down against the dollar at around $1.2022.

The U.S. dollar index rose 0.134% to 104.220

Data released on Friday showed U.S. consumer spending barely rose in November while inflation cooled further, reinforcing expectations that the Federal Reserve could scale back its aggressive monetary policy tightening.

"In line with its seasonal trend, December has been a soft month for the greenback," ING FX strategist Francesco Pesole said.

"It's worth remembering that the dollar rose in each of the past four years in January. Our view for early 2023 is still one of dollar recovery."

The Japanese yen fell 0.44% against the dollar to 133.45, despite a surge in short-term government bond yields to their highest in over seven-and-a-half years, following an auction that attracted relatively weak demand.

Still, the yen is heading for its biggest quarterly rally against the dollar since 2008, with a rise of 8.1%, following a surprise decision last week by the Bank of Japan (BOJ) to adjust its monetary policy.

BOJ Governor Haruhiko Kuroda on Monday dismissed the chance of a near-term exit from ultra-loose monetary policy, even as markets and policymakers are signalling an increasing focus on what comes after Kuroda's tenure ends in April next year.

"While ... (the) policy tweak has added uncertainty to the BOJ outlook, we continue to lean toward BOJ policymakers making no further policy adjustments through the end of 2023," analysts at Wells Fargo (NYSE:WFC) said in a note.

"Inflation pressures are expected to ease, which should lessen the BOJ's motivation for further policy moves."

In cryptocurrencies, bitcoin was last down 0.33% at $16,775, while ether last fell 0.57% to $1,210.00.

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Currency bid prices at 9:55AM (1455 GMT)

Description RIC Last U.S. Close Pct Change YTD Pct High Bid Low Bid

Previous Change

Session

Dollar index 104.2300 104.1000 +0.13% 8.955% +104.4000 +103.8800

Euro/Dollar $1.0627 $1.0635 -0.07% -6.51% +$1.0670 +$1.0612

Dollar/Yen 133.4500 132.8500 +0.46% +15.93% +133.5850 +132.6400

Euro/Yen 141.80 141.32 +0.34% +8.81% +142.2700 +141.1500

Dollar/Swiss 0.9297 0.9315 -0.16% +1.96% +0.9329 +0.9270

Sterling/Dollar $1.2023 $1.2068 -0.37% -11.10% +$1.2112 +$1.2005

Dollar/Canadian 1.3501 1.3575 -0.54% +6.79% +1.3578 +1.3500

Aussie/Dollar $0.6742 $0.6732 +0.16% -7.24% +$0.6776 +$0.6726

Euro/Swiss 0.9879 0.9908 -0.29% -4.73% +0.9924 +0.9878

Euro/Sterling 0.8839 0.8814 +0.28% +5.23% +0.8857 +0.8801

NZ $0.6286 $0.6271 +0.26% -8.15% +$0.6318 +$0.6271

Dollar/Dollar

Dollar/Norway 9.8265 9.8500 -0.52% +11.23% +9.8725 +9.7990

Euro/Norway 10.4443 10.4625 -0.17% +4.31% +10.5035 +10.4464

Dollar/Sweden 10.4633 10.4871 -0.32% +16.03% +10.5023 +10.4167

Euro/Sweden 11.1217 11.1574 -0.32% +8.67% +11.1638 +11.1068