Dollar Edges Higher as Softer European Inflation Weighs on Euro

BY COMFORT OGBONNA

The U.S. dollar edged slightly higher against its European counterparts on Tuesday, with the euro under pressure after softer-than-expected inflation data, though overall currency moves remained subdued as investors focused more on commodities and global equity markets. With stocks hovering near record highs and risk appetite largely intact, foreign exchange trading was relatively restrained.

The euro slipped 0.2% to $1.1699, giving back modest early gains after fresh data showed inflation cooled more sharply than anticipated in Germany and France in December. The figures reinforced expectations that price pressures across the euro zone are easing, reducing the urgency for tighter monetary policy. Following the data, European government bond yields fell by around three basis points, while U.S. Treasury yields edged higher, a relative shift that weighed further on the common currency.

Market participants broadly expect the European Central Bank to keep interest rates unchanged throughout the year. If inflation continues to hover near the ECB’s 2% target, policymakers are seen as having little incentive to rush toward further tightening, keeping the euro on the defensive against the dollar.

Sterling also weakened, falling 0.17% to $1.13517, as traders speculated that upcoming UK inflation data could mirror the softer readings seen on the continent. The pound had earlier touched a near four-month high against both the dollar and the euro before reversing course, suggesting profit-taking amid cautious positioning.

The shock from the U.S. capture of Venezuelan President Nicolás Maduro over the weekend appeared to have only a fleeting impact on currency markets. While the event initially sparked a brief move into the safety of the dollar, that reaction quickly faded as investors refocused on strong equity performance. Francesco Pesole, an FX analyst at ING, said that more than 48 hours after the U.S. military operation in Venezuela, there were few lasting traces in foreign exchange markets. He added that the solid performance of equities, despite geopolitical risks, was the main driver behind the unwinding of earlier dollar gains.

The dollar was steady against the Japanese yen at 156.46, while the dollar index, which tracks the U.S. currency against a basket of six major peers, inched up to 98.42. The index had slipped slightly on Monday after U.S. data showed manufacturing activity contracted more than expected in December, hitting a 14-month low, and after dovish remarks from Minneapolis Federal Reserve President Neel Kashkari.

Kashkari warned that the U.S. unemployment rate could rise more sharply than anticipated, comments that nudged expectations for monetary easing higher. Even so, futures markets continue to price in roughly an 80% chance that the Federal Reserve will keep interest rates unchanged at its next policy meeting on January 27–28, suggesting that any near-term shift in policy remains unlikely.

Elsewhere in the currency market, the Australian dollar continued to outperform, benefiting from improved global risk sentiment and strong equity markets. The currency climbed to a more than one-year high of $0.6739 on Tuesday. The U.S. dollar was marginally weaker against the Chinese yuan in offshore trading, slipping to around 6.983 yuan.

In contrast, traditional safe-haven currencies lagged amid the upbeat market mood. The Swiss franc struggled as demand for safety waned, with the dollar rising 0.18% against the franc to 0.7928. Overall, currency markets reflected a balance between easing inflation pressures, resilient risk appetite, and cautious expectations around central bank policy in the months ahead.