Higher Interest Rates in China Can’t Support US Dollar

The US dollar weakened today as investors’ demand for the riskier assets persists even after China has increased its interest rates. It looks like attempts of China’s government to cool the nation’s economy aren’t enough to diminish optimism for the global growth.
The report for the fourth quarter of the previous year is expected to show that the inflation in China increased by 4.6 percent, the fastest growth in 30 months. The rapidly accelerating inflation prompted the People’s Bank of China to increase the interest rates in an attempt to keep the growth near the 4 percent target for this year. The bank raised the benchmark one-year lending rate from 5.81 percent to 6.06 percent, effective tomorrow, and the one-year deposit rate from 2.75 percent to 3 percent. Some analysts, including Stephen Roach, the non-executive chairman of Morgan Stanley Asia Ltd., say that the pace of the interest rates increases isn’t enough to counter the inflation pressure.
Fabian Eliasson, the head of US currency sales at Mizuho Financial Group Inc., commented on the performance of the currencies after the move by China:

The move by the Chinese was fairly expected, and the currency market is pretty unfazed and is taking it in stride so far. The euro is up from yesterday as you’re seeing a calmer situation in Egypt, and that’s certainly helping the euro. The overall global situation is better.

EUR/USD advanced from 1.3582 to 1.3683 as of 17:05 GMT today. USD/JPY traded near 81.92 after it opened at 82.32 and reached the intraday low of 81.76.

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