Dollar weakens as Chinese data boosts risk appetite

John Phillips | Digital Editor | CNBC

The greenback weakened on Wednesday as better-than-expected economic data in China bolstered risk appetite and boosted the Australian dollar.

China's economy grew at a steady 6.4 percent pace in the first quarter, defying expectations for a further slowdown, as industrial production surged and consumer demand showed signs of improvement.

Risk sentiment seems to have improved overnight on the back of the strong Chinese data, said Shaun Osborne, chief FX strategist at Scotiabank in Toronto. Investors are closely watching Chinese and European economic data for signals that global growth is recovering.

The release of Purchasing Managers Indexes (PMIs) for the manufacturing and service sectors in Europe on Thursday will provide the next indication of the strength of the European economy. Investment inflows into Europe have been improving, which may give the euro a boost against the greenback.

The U.S. dollar is also heading into a period of the year when it has traditionally weakened. Were at the upper end of the range for the dollar and we think seasonal pressures should start to weigh a little bit more on the dollar going forward, generally this is about the time of year when the dollar starts to soften up from a seasonal point of view, said Osborne.

The outperformed on the Chinese data. The currency is sensitive to the economic fortunes of China, Australias biggest trading partner.

"It is becoming very clear again this morning what really matters for the Australian dollar is China. The currency is up despite the fact that the RBA rate meeting caused negative sentiment yesterday," said Esther Maria Reichelt, an FX strategist at Commerzbank in Frankfurt.

The New Zealand dollar, meanwhile, fell after data showed that annual inflation slowed in the first quarter, which raised the odds of an interest rate cut in the coming months.

Data on Wednesday also showed that the U.S. trade deficit fell to an eight-month low in February as exports to China surged, helping to eclipse a rebound in overall imports, which could boost economic growth estimates for the first quarter.