U.S. dollar plunges as China ditches quarantine policy

The U.S. dollar plunged on Tuesday following the Chinese government said inbound travelers are no longer required to quarantine upon arrival.

The U.S. dollar index — which tracks the greenback's position against a basket of several major currencies — declined by 0.1 percent to 104.04.

The euro rose 0.2 percent against the dollar to trade at $1.06545. It also gained over the Japanese yen to 141.89 per euro. The U.K. sterling remained on the flatline against the greenback at around $1.2071. Sterling trading slowed down as the U.K. markets closed for a public holiday.

Risk-related currencies, like Australian and New Zealand dollars, strengthened against the U.S. currency. The New Zealand dollar traded at $0.6316, rising by 0.7 percent. The Australian dollar rose by 0.5 percent to trade at $0.6765.

Analysts often use both currencies as liquid proxies for the Chinese yuan. The offshore yuan traded at 6.9686 per dollar, gaining 0.1 percent.

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By omitting quarantine obligations for incoming travelers, Xi's administration showed its commitment to re-open China's economy, according to OCBC currency strategist Christopher Wong. Wong added that there had been reports of the Chinese government's plans to further support economic growth.

The Chinese National Health Commission announced Monday that the new regulation would be effective on January 8. Beijing — previously a hotspot for COVID-19 cases — has downgraded its health management category to B from the top-level A. This decision came amid rising COVID-19 cases in the country.

Danske Bank's strategists said China's relaxation of its COVID-19 policies could provide an extra boost for the euro. The currency itself had strengthened in the past days due to the European Central Bank's recent increase of its primary interest rate by 50 basis points. ECB president Christine Lagarde even said the central bank planned to increase interest rates further in 2023.

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

Francesco Pesole, FX Strategist at ING

ING FX strategist Francesco Pesole described December as a "soft month" for the dollar. Pesole, however, projected that the dollar would recover at the beginning of 2023.

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

Last Friday, data showed that American consumer spending went down in November, signaling cooling inflation. This new finding increased investor confidence that the Federal Reserve might loosen its tight policy soon.

While the dollar plunged, the oil market rose on Tuesday. Oil prices rose slightly due to concerns regarding logistics and production amid winter storms across U.S. cities. Brent crude traded at $84.65 a barrel or increased by 0.9 percent, while the U.S. West Texas Intermediate crude rose by 1.1 percent to $80.41 a barrel.

Yen falls slightly Tuesday

Although the Japanese yen gained over the dollar last week, it fell by 0.2 percent to trade at 133.07 per dollar. The Bank of Japan (BoJ) changed its policy regarding the 10-year government bond yield last week, causing a surge in the yen's value. Data showed that the yen is on track for its largest quarterly rally against the greenback with an 8.1 percent boost.

BoJ's policy change initially led investors to think that it would follow other central banks in increasing interest rates. Currently, the benchmark interest rates in Japan remain relatively low.

BoJ governor Haruhiko Kuroda, however, dismissed the speculation on Monday, saying the bank is not planning to tighten its monetary policy anytime soon. Wells Fargo analysts shared that BoJ was unlikely to tweak its policy until the end of next year.

"Inflation pressures are expected to ease, which should lessen the BOJ's motivation for further policy moves," Wells Fargo's report said.