Stefano Rebaudo

(Reuters) – The dollar rose on Tuesday on expectations of U.S. inflation data, which could provide clues to the Federal Reserve’s monetary easing path, as analysts assess the likely impact of Donald Trump’s policies as the U.S. president begins his second term.

The Australian dollar fell sharply as the Reserve Bank of Australia (RBA) softened its tone on the inflation outlook, while a rally led by China’s stimulus promises stalled after tender Chinese trade data.

Money markets are pricing in an 86% chance that the U.S. Federal Reserve will cut interest rates by 25 basis points next week, but some analysts warn that Fed hawkishness may have more weight in upcoming decisions.

“The (median) Fed consensus will be to tilt the outlook in a more hawkish direction than in September or November,” said Thierry Wizman, global forex and interest rate strategist at Macquarie.

The U.S. dollar rose 0.2% to 151.55 yen, after previously rising to 151.71 yen for the first time since November 28.

The index, which measures the currency against the yen and five other major currencies, rose 0.2% to 106.34.

Macquarie’s Wizman said several key factors will likely influence the Fed’s future moves: potential inflation from the next administration’s policies, a recent slowdown in the pace of disinflation, a lower-than-expected unemployment rate and signs of enthusiasm in U.S. financial markets.

Market participants don’t see much action ahead of a busy second half of the week with US data and the European Central Bank’s policy meeting.

The ECB’s quarter-point cut is already planned, but investors will focus on communications that may provide clues about the central bank’s future moves.

The euro fell 0.26% to $1.0526.

Analysts noted that the ECB could remove the reference to the need to maintain “sufficiently restrictive” interest rates, while President Christine Lagarde could say at a news conference that inflation is broadly on track to fall to target.

It was down 0.68% at $0.6397 as of 11:00 GMT and had earlier fallen to $0.6380, within striking distance of Friday’s low of $0.6373, a level not seen since August 5.

A day earlier, it rose 0.8% after China pledged “appropriately loose” monetary policy next year.

Chinese exports grew at a slower pace in November, while imports unexpectedly fell, weighing on expectations for the Australian economy, of which China is its largest trading partner.

Chinese stocks pared gains while Hong Kong stocks fell as initial optimism about Beijing’s policy change faded.

The RBA kept interest rates steady as expected, but noted that the board had become “confident” that inflation was returning to target.

“A full price-in (interest rate cut) in the next few weeks would have an even greater impact on the Australian dollar,” said Volkmar Baur, forex strategist at Commerzbank (ETR:), recalling that the two labor market reports and inflation data for the fourth quarter will be published before the next political meeting in February.

Swaps now mean there is a 54% chance of a rate cut in February, with the first cuts more than fully priced in by April next year.

“While a negative inflation surprise in the fourth quarter may trigger a February rate cut, we believe that the continued tightening of the labor market and acceleration in consumption growth indicate that the Bank will ease the changes only at the May meeting,” said Marcel Thieliant, head of the Asia-Pacific region at Capital Economics.

The New Zealand dollar fell in sympathy with the Australian dollar, falling 0.68% to $0.5825.

Investors will be closely watching the China Central Economic Work Conference behind closed doors as key goals and policy intentions for next year are set.

The yuan strengthened about 0.13% to 7.2589 per dollar in foreign trade, helped by Monday’s surprise shift in Beijing’s monetary policy stance toward greater easing to stimulate the troubled economy.

Elsewhere, the Bank of Canada and the Swiss National Bank make decisions on Wednesday and Thursday, respectively, with deep interest rate cuts expected in both cases.

Compared to Canada, the US dollar rose to its highest level since April 2020 at C$1.41895.

The US currency fell 0.14% to 0.8801 Swiss francs.