The U.S. dollar strengthened on Wednesday, lifted by renewed optimism over progress in U.S.-China trade talks, while traders looked ahead to the Federal Reserve’s upcoming policy announcement later in the day.
At 09:20 GMT, the U.S. Dollar Index, which tracks the greenback against six major currencies, was up 0.3% at 98.787, recovering after two consecutive sessions of declines.
Trade optimism supports dollar
U.S. President Donald Trump continued his Asia tour, arriving in South Korea, where he is scheduled to meet with Chinese President Xi Jinping on Thursday.
Market sentiment improved after Trump said he believed the two sides would reach a “great deal”, signaling optimism for a possible easing in trade tensions between the world’s two largest economies.
Trump suggested the agreement could involve reducing tariffs on Chinese imports in exchange for Beijing’s commitment to halt exports of fentanyl precursor chemicals.
He also noted he may discuss Nvidia’s (NASDAQ:NVDA) advanced Blackwell AI chips with Xi, referring to ongoing U.S. export restrictions on cutting-edge semiconductors — a key sticking point in trade relations.
Still, gains for the dollar were limited as traders awaited the Fed’s widely expected 25-basis-point rate cut later in the session. Markets are also seeking guidance from Fed Chair Jerome Powell on whether additional rate cuts could follow in the coming months amid signs of labor market softening.
“The ingredients for another ‘buy the rumor, sell the fact’ dollar rally are all there,” said analysts at ING. “So, while risks are slightly tilted to the upside for USD today, any rally should be smaller and shorter-lived than in September. The likely announcement of the end of QT could also limit USD upside.”
Euro softens ahead of ECB meeting
The euro edged lower, with EUR/USD down 0.2% to 1.1623, ahead of Thursday’s European Central Bank policy meeting. The ECB is widely expected to keep rates unchanged.
“The implications for EUR/USD are likely to be limited, and today’s FOMC should be the only input – if anything – for direction in the pair,” ING added. “We see some modest upside risks for the USD. That may not be enough to take EUR/USD sustainably below 1.160, though, and the short-term outlook for the pair remains neutral.”
Elsewhere, GBP/USD slipped 0.5% to 1.3202, while USD/CAD was steady at 1.3947 ahead of the Bank of Canada’s rate decision later in the session.
“Markets are largely pricing in a cut, but it will be hard for the BoC to shut the door to more easing given the worsening trade picture,” ING said.
Yen near 8-month lows before BOJ decision
In Asia, the yen hovered near its weakest levels in eight months, with USD/JPY up 0.1% at 152.24, as markets bet that the Bank of Japan will maintain its ultra-loose policy stance when it meets on Thursday.
The BOJ is expected to hold rates steady as it navigates expectations for looser fiscal policy under newly elected Prime Minister Sanae Takaichi. Her election has weighed on the yen, as investors anticipate increased government spending and resistance to tighter monetary conditions.
The Chinese yuan (USD/CNY) traded slightly higher at 7.0995, with traders awaiting Thursday’s Trump-Xi meeting, expected to yield progress toward de-escalating trade tensions. Trump told reporters he was open to lowering fentanyl-related tariffs on China and planned to discuss rare earths and AI chips, including those made by Nvidia.
Meanwhile, the Australian dollar climbed 0.4% to 0.6611, hitting a near three-week high, after hotter-than-expected inflation data reduced expectations for additional rate cuts by the Reserve Bank of Australia.
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