Dollar strengthens as traders process trade talks and Fed meeting

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By Kevin Buckland and Alun John

TOKYO/LONDON (Reuters) -The dollar ticked up against European peers on Wednesday, particularly the pound, helped by signs the U.S. and China are set to agree a trade war truce, and as traders awaited the Federal Reserve meeting later in the day.

U.S. President Donald Trump on Wednesday sounded an optimistic note about a looming summit with China’s Xi Jinping and finalised details with South Korean President Lee Jae Myung of their fraught trade deal.

Trump is due to meet Xi on Thursday and said he expects to reduce U.S. tariffs on Chinese goods in exchange for Beijing’s commitment to curb exports of fentanyl precursor chemicals.

The dollar’s strength may be some kind of relief from the “Trump tariff festival”, said Bart Wakabayashi, Tokyo branch manager at State Street.

“The dollar has been sold quite a bit for an extended period of time, so I do think there’s more of a market mechanism that at some point it’s going to rebound, and it can be overly reactive,” he added.

The euro dipped 0.15% to $1.1636, set to snap a five-day streak of gains, and the dollar also rose 0.5% against the safe-haven Swiss franc to 0.7972, moving further off last month’s multi-year lows.

The news also boosted Asian currencies with Korea’s won strengthening sharply. The dollar was last down 0.6% on the won at 1,422, and China’s yuan traded onshore ended the domestic session at 7.0991 per dollar, its strongest close since November 4. [CNY/]

WAITING FOR THE FED

The U.S. Federal Reserve’s meeting is also top of mind. Traders see it as all but certain to cut rates as policymakers steer the economy based on limited data that has nevertheless supported concerns about a weakening jobs market.

Market pricing indicates a further rate reduction is expected in December, with two more by July next year, so investors will be watching to see if data-starved Fed Chair Jerome Powell’s press conference will change that.

Both the European Central Bank and the Bank of Japan are expected to hold rates steady on Thursday.

The yen was a fraction weaker at 152.3 per dollar. It briefly strengthened after U.S. Treasury Secretary Scott Bessent posted on X that the Japanese government’s “willingness to allow the Bank of Japan policy space will be key to anchoring inflation expectations and avoiding excess exchange rate volatility”.

Bessent, who was in Japan with Trump for talks with the newly-formed government of Prime Minister Sanae Takaichi, has repeatedly criticised the BOJ for its slow pace of rate hikes.

STERLING AND AUSSIE

Britain’s pound and the Australian dollar were also big movers, linked to changes in central bank policy expectations, though the Bank of England and Reserve Bank of Australia do not meet until next week.

Sterling shed 0.5% against the dollar to $1.3198, its lowest in nearly three months, as markets see an increasing chance of a BoE rate cut this year, and maybe as early as next week.

Goldman Sachs said on Tuesday it expected the BoE to cut rates next month, having previously seen no easing this year.

The pound hit its weakest in over two years versus the euro and is at its weakest against the Swiss franc since September 2022.

The Aussie dollar rose after hotter-than-expected quarterly consumer price data threw into doubt a rate cut from the RBA next week, or even at the following meeting in December.

It rose as high as $0.65895 after the data, but later walked back that move and was last just a fraction stronger at $0.6590. [AUD/]

“The earliest the (RBA board) will be in a position to get more comfort on inflation is with the next quarterly print ahead of the February 2026 meeting,” said Luci Ellis, chief economist at Westpac.

“Even a February cut is far from certain now, given the size of the upside surprise (for inflation) this quarter.”

(Editing Kim Coghill, Mark Potter and Ed Osmond)