Investing.com - The U.S. dollar edged higher in early European trade Wednesday, as traders sought out this safe haven after disappointing Chinese trade data hit sentiment.
At 03:05 ET (07:05 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% higher at 104.162, not far removed from the 2½-month peak of 104.70 seen at the end of May.
China's trade surplus sank to a 13-month low in May, according to data released earlier Wednesday, driven chiefly by a surprise drop in exports as foreign demand for Chinese goods dried up.
The slump in exports is indicative of slowing economic growth in Europe and the U.S., China’s primary markets for locally produced goods, and this has boosted demand for the dollar, a safe haven in times of stress.
The dollar has also benefited from the turmoil in the cryptocurrency markets, following the crackdown by the Securities and Exchange Commission on the crypto industry.
Gains are limited though as traders await next week’s Federal Reserve policy-setting meeting amid uncertainty of its next move.
Money markets are pricing in a roughly 19% chance that the U.S. central bank will raise rates by 25 basis points next week, compared to an over 60% chance a week ago, according to the CME FedWatch tool, after weak U.S. services activity data.
That said, the decision of the Reserve Bank of Australia to raise its cash target rate by 25 basis points on Tuesday, citing still high inflation, does create the possibility of an upside surprise.
It also puts the focus on the Bank of Canada’s meeting later this session amid speculation that it too could resume rate hikes, following recent sticky inflation data.
“A 25bp BoC rate hike … (now priced with a 43% probability) would probably cause ripples across core bond markets around the world and could keep the dollar bid on the view that the Fed might be closer to hiking than first thought,” said analysts at ING, in a note.
AUD/USD fell 0.1% to 0.6667, with the Aussie dollar handing back some of the previous session's 0.8% gain, USD/CNY rose 0.1% to 7.1267, while USD/CAD rose 0.1% to 1.3420.
Elsewhere, EUR/USD fell 0.2% to 1.0676 after data showed that German industrial production rose slightly less than expected in April, increasing by 0.3% on the previous month, compared with the expected increase of 0.6%.
The European Central Bank also meets next week and is widely expected to continue hiking interest rates with inflation remaining well above the central bank’s 2.0% target.
The ECB hasn’t finished increasing borrowing costs as core inflation proves stubborn, Executive Board member Isabel Schnabel said in an interview with De Tijd.
“We have more ground to cover,” she was quoted as saying in the newspaper. “It will depend on the incoming data by how much more rates will have to increase.”
GBP/USD fell 0.2% to 1.2405 after data from mortgage lender Halifax indicated that British house prices dropped on an annual basis in May for the first time in 11 years.