The move is a significant step in reopening China's borders and has boosted risk-sensitive currencies such as the Australian and New Zealand dollars.
The Australian dollar increased by 0.5% to $0.6765, and the New Zealand dollar rose by 0.7% to $0.6316. The offshore Chinese yuan also increased by 0.1% to 6.9686 per dollar. This easing of COVID-19 restrictions could boost the euro, supported by the European Central Bank's strict stance on inflation.
Euro and Yen Rise
The euro rose by 0.2% against the dollar and the yen, reaching $1.06545 and 141.89, respectively. The Japanese yen fell by 0.2% against the dollar to 133.07, despite a surge in short-term government bond yields to their highest level in over seven and a half years.
The yen is on track for its biggest quarterly rally against the dollar since 2008, with an increase of 8.1%, following the Bank of Japan's surprise decision to adjust its monetary policy last week.
US Dollar and Sterling Remain Flat
The US dollar index decreased by 0.1% to 104.04 as data released on Friday showed that consumer spending in the US barely increased in November, and inflation cooled further.
This reinforces the expectation that the Federal Reserve may scale back its aggressive monetary policy tightening. The pound was unchanged against the dollar at around $1.2071 due to the UK market being closed for a public holiday.
COVID-19 Cases Spike as Restrictions Ease in China
Despite a surge in COVID-19 cases in China, the country has shown no signs of slowing down in its efforts to relax restrictions. Christopher Wong, a currency strategist at OCBC, stated that "there seems to be no let-up in the pace of relaxing COVID restrictions despite the surge in COVID cases in the mainland.
This perhaps demonstrates Chinese policymakers' resolve to full reopening." In addition to easing travel restrictions, China has downgraded its regulations for managing COVID-19 cases to the lighter Category B from the top-level Category A. This demonstrates the country's determination to reopen despite the current COVID-19 situation.

Euro Could Benefit from Eased COVID-19 Restrictions in China
The euro may see a boost from China's gradual easing of its zero-COVID policies. The euro has already been performing well due to the European Central Bank's tough stance on inflation.
Danske Bank strategists stated that "a faster end to COVID restrictions would support the Chinese economy and benefit the euro area and the euro." As China's economy recovers, it could positively affect the euro and the euro area.
US Dollar Expectations for Early 2023
The US dollar had a soft month in December, in line with its seasonal trend. However, it is worth noting that the dollar has risen in January each for the past four years. ING FX strategist Francesco Pesole stated that their view for early 2023 is still one of dollar recovery.
Data released on Friday showed that US consumer spending barely rose in November. Inflation cooled further, leading to expectations that the Federal Reserve may scale back its aggressive monetary policy tightening. This could potentially contribute to the recovery of the US dollar in the coming year.