The U.S. dollar strengthened on Wednesday, supported by renewed optimism about a potential U.S.-China trade agreement and cautious positioning ahead of the Federal Reserve’s interest rate decision later in the day.
At 05:20 ET, the Dollar Index, which measures the greenback against six major peers, rose 0.3% to 98.787, recovering from two straight sessions of losses.
Trade optimism lifts sentiment
U.S. President Donald Trump’s Asia trip has shifted focus to South Korea, where he is expected to meet Chinese President Xi Jinping on Thursday.
Markets were buoyed after Trump said he believed the two sides would reach a “great deal”, reinforcing optimism that an accord could ease years of trade friction between Washington and Beijing.
According to Trump, the potential deal may include a reduction in tariffs on Chinese imports in exchange for Beijing’s pledge to stop exporting fentanyl precursor chemicals. He also mentioned plans to discuss Nvidia’s (NASDAQ:NVDA) Blackwell AI chips with Xi — an area of ongoing tension due to U.S. export restrictions on advanced semiconductors.
Still, traders remained cautious ahead of the Federal Reserve’s widely expected 25-basis-point rate cut. Investors are looking for clues from Fed Chair Jerome Powell on whether policymakers will continue cutting rates into year-end amid signs of a cooling labor market.
“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, pound slip as markets turn to central banks
The euro dipped, with EUR/USD down 0.2% to 1.1623, ahead of Thursday’s European Central Bank meeting. The ECB is expected to leave interest 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 noted. “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.”
The British pound also weakened, with GBP/USD falling 0.5% to 1.3202, while USD/CAD traded flat at 1.3947 as markets awaited the Bank of Canada’s policy announcement.
“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 added.
Yen steady as BOJ meeting looms
In Asia, the yen hovered near eight-month lows, with USD/JPY edging up 0.1% to 152.24, as traders bet the Bank of Japan will maintain its ultra-loose monetary policy when it meets on Thursday.
The BOJ is expected to keep rates unchanged amid speculation that new Prime Minister Sanae Takaichi will introduce expansive fiscal measures and push back against tighter policy. Her election earlier this month has added pressure on the yen, with investors anticipating higher government spending.
The Chinese yuan (USD/CNY) was little changed at 7.0995, ahead of Thursday’s Trump-Xi summit, where both leaders are expected to discuss ways to de-escalate trade tensions. Trump said he was open to lowering tariffs tied to fentanyl exports and would raise topics such as rare earth materials and AI chips, particularly those made by Nvidia.
Meanwhile, the Australian dollar climbed 0.4% to 0.6611, reaching a three-week high after stronger-than-expected inflation data reduced expectations for further rate cuts by the Reserve Bank of Australia.
Overall, the dollar’s upward move reflects a mix of trade optimism and Fed-related caution, with markets bracing for what could be one of the most closely watched central bank meetings of the year.