Dollar Gains on Report China May Allow Weaker Yuan

The dollar strengthened after a report that Chinese leaders are considering allowing their currency to weaken as they brace for higher tariffs under a second Donald Trump presidency, Bloomberg reported.

The offshore yuan dropped as much as 0.5% to 7.2921 per dollar before trimming declines, after Reuters reported that policymakers are mulling allowing the yuan to depreciate, abandoning the current stable-currency policy. The move spilled over globally, triggering drops in China proxies such as Australian and New Zealand dollars, as well as in key emerging-market currencies such as the South African rand. Bloomberg’s dollar index gained as much as 0.2% to touch a two-week high.

The report from China jolted markets that were in a lull ahead of key US inflation data, which will offer the Federal Reserve another look at price pressures before next week’s policy meeting. Futures on the S&P 500 and Nasdaq 100 fluctuated, while Europe’s Stoxx 600 benchmark erased an early decline.

“From a number of angles I thought it would’ve made sense for China to weaken their currency,” said Hetal Mehta, head of economic research at St James Place Management, noting a cheaper yuan could help offset China’s flagging exports and deflation. “The dollar has been pretty strong anyway, in anticipation of tariffs, or just the pricing out of some of the rate cuts that people thought the Fed would implement.”

While swap markets almost fully expect a quarter-point rate reduction next week, they have trimmed bets on rate cuts expected from the Fed over this cycle. Mehta also said that after a series of record highs on the S&P 500, traders will likely wait for details of Trump’s agenda before embarking on more significant moves.

“Some of the recent strength is related to forthcoming tax cuts and what that would mean for corporate profits so markets now want to wait and see that delivered,” she said.

Aside from the US data, it’s a big week for policymaking globally, with the Bank of Canada seen cutting rates later on Wednesday, while the European Central Bank and Swiss National Bank are expected to do so Thursday. Meanwhile, China’s two-day Central Economic Work Conference is expected to map out policies for next year, with traders emboldened by stimulus signals from top leaders.

Among individual stock-market movers, Zalando SE shares slumped after the German retailer agreed to buy rival About You Holding SE, offering a premium of about 67% to Tuesday’s closing price. Fellow fashion retailer Inditex SA, the owner of Zara, fell after reporting slower sales growth, while German sportswear maker Adidas AG also slipped after authorities raided its headquarters as part of a tax investigation.

In New York premarket trade, videogame retailer GameStop Corp. rose after reporting a surprise profit. Walgreens Boots Alliance Inc. dropped on a report that Sycamore Partners is in talks to acquire struggling drugstore chain.