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Dollar Falls as Risk Appetite Increases; Australian and New Zealand Currencies Rise

The value of the dollar declined on Tuesday, while the Australian and New Zealand dollars increased along with a rise in risk appetite following China's announcement that it would eliminate its COVID-19 quarantine rule for incoming travelers.

One Dollar Bill
One Dollar Bill

This is a significant step towards reopening its borders. The New Zealand dollar increased by over 0.5% in early Asian trade and was last 0.28% higher at $0.6288, while the Australian dollar gained 0.27% to $0.6750 in mostly low trading volume during the holiday season. These two currencies are often used as liquid alternatives to the Chinese yuan. The offshore yuan rose by more than 0.1% to 6.9681 per dollar.

China's Relaxation of COVID Restrictions Despite Spike in Cases

The National Health Commission of China announced on Monday that starting on January 8, incoming travelers will no longer be required to go into quarantine upon arrival, even as COVID cases increase. At the same time, Beijing downgraded regulations for managing COVID cases to the less strict Category B from the top-level Category A. Christopher Wong, a currency strategist at OCBC, commented,

"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."

Wong added,

"In addition, there was news of China potentially taking extraordinary measures to support growth."
100 Dollar Bill Changing Hands
100 Dollar Bill Changing Hands

US Dollar Index Falls as Federal Reserve Expectations Shift

Data released on Friday showed that US consumer spending barely increased in November while inflation cooled further, reinforcing expectations that the Federal Reserve may scale back its aggressive monetary policy tightening. ING FX strategist Francesco Pesole said,

"In line with its seasonal trend, December has been a soft month for the greenback."

People added,

"It's worth remembering that the dollar rose in each of the past four years in January. Our view for early 2023 is still one of dollar recovery."

Japanese Yen Stabilizes as Bank of Japan Maintains Ultra-Loose Monetary Policy

The Japanese yen remained stable at 132.89 per dollar as the recently weaker currency continues to be supported by the Bank of Japan's (BOJ) unexpected change to its yield curve policy last week. BOJ Governor Haruhiko Kuroda dismissed the possibility of a near-term exit from an ultra-loose monetary policy on Monday, even as markets and policymakers are signaling an increasing focus on what comes after Kuroda's tenure ends in April of next year.

Analysts at Wells Fargo commented,

"While...(the) policy tweak has added uncertainty to the BOJ outlook, we continue to lean toward BOJ policymakers making no further policy adjustments through the end of 2023. Inflation pressures are expected to ease, which should lessen the BOJ's motivation for further policy moves."