Peter Nurse

Investing.com – The U.S. dollar edged higher in early European trade Wednesday, stabilizing after the previous session’s weakness as Federal Reserve Chair Jerome Powell soothed fears the central bank will tighten monetary policy aggressively this year.

After falling to 95.535 at the Asian session (the lowest since Nov. 18), the Dollar Index which measures the greenback’s performance against six other currencies traded higher at 95.675 AM ET (075 GMT).

The stock traded 0.1% higher at 115.41 after recovering from the one-week lows of 115.04 and 115.04. The index edged down to 1.1357 and was steady at 1.3632. This is just a short distance from its one-month peak. In one week, the risk-sensitive index climbed 0.1% from 0.7217 to reach its highest level.

Powell said Tuesday that he believed the U.S. could withstand rising interest rates and an inflation-fighting runoff, and expressed his confidence in this statement. However, he added policymakers were still debating their plans on reducing the central bank’s balance sheet, allaying market fears for a sudden withdrawal of monetary support.

“What he didn’t say was also important. He didn’t back four rate hikes in 2022, nor a March start to hikes, nor did he give any details on when the Fed balance sheet run-off would start,” said Jeffrey Halley, an analyst at OANDA.

The previous Fed speakers have been more optimistic. Raphael Bostic (Atlanta Fed President) and Esther George (Kansas Fed President) both stated this week high inflation and strong recovery justifying a swift rundown of Fed asset assets. 

The session will focus on the U.S. headline CPI, which is expected to rise to a staggering 7% year-on-year.

“The U.S. inflation data later today will either confirm a period of U.S. dollar weakness or result in a nasty whipsaw in price action,” Halley added.

Elsewhere, fell 0.2% to 6.3646 after the release of China’s consumer and factory-gate inflation for December.

The grew 1.5% year-on-year, lower than November’s 2.3% growth, while the rose 10.3%, a slowdown from November’s 12.9%. These figures allow the People’s Bank of China to relax monetary policy to offset the effects of a slowdown of the huge real estate sector.