The U.S. dollar drifted lower on Wednesday in thin rangebound trading, with investors looking ahead to Thursday's U.S. consumer prices report for indications on where the Federal Reserve's monetary policy is headed.
The greenback posted steeper losses earlier in the session, particularly after data showing the Chinese economy slipped into deflation last month. That raised the chances of China launching additional stimulus measures and nudged investors into risk assets.
Reported dollar selling by state-owned Chinese banks also helped the yuan rally from a one-month low, dealers said. The Chinese central bank's stronger-than-expected exchange-rate fixing at 7.1588 per dollar before the open signaled its discomfort with the yuan's recent declines.
The greenback was last down 0.1% against the offshore yuan at 7.227.
Investors are now focused on Thursday's U.S. inflation data, which looms large in a market hungry for clues on the path for Fed policy. Wall Streets economists expect the year-on-year core consumer price index (CPI) to have risen 4.8% in July, unchanged from the previous month.
"We're still pretty convinced about inflation in the U.S. continuing to ease, led by a disinflation in shelter prices - which is 35% of the headline CPI index," wrote Macquarie analysts led by FX & rates strategist Thierry Wizman.
"We expect that CPI may come in on the low side of expectations (4.7% year-over-year) and do so because of disinflation in primary and owner-equivalent rents."
The dollar index, which measures the performance of the U.S. currency against six others, slipped 0.1% to 102.46, partly reversing Tuesday's rise.
The euro rose 0.2% to $1.0976, while sterling slid 0.2% to $1.2721.
European markets gained after equities tumbled the day before as the Italian government announced a surprise 40% windfall tax on banks.
Italy's finance ministry subsequently clarified that the one-off measure, which targets gains from banks' higher interest rates, would not amount to more than 0.1% of their total assets.
In China, the country's consumer prices fell for the first time in more than two years in July. Rather than lifting safe-haven appetite for the dollar, the figures reinforced the view that the Chinese government might take steps to underpin the economy with monetary stimulus.
There were also more dovish signals from Fed officials overnight, with Philadelphia Fed President Patrick Harker suggesting interest rates are high enough already, echoing the view of Atlanta Fed President Raphael Bostic.
The message has been far from uniform though, with Fed Governor Michelle Bowman saying on Monday further hikes are likely.
Against the yen, the dollar rose 0.2% to 143.70 yen.
"With the 10-year yield spread between the U.S. and Japan still holding at roughly 3.4% ... and the prospect of any official BOJ (Bank of Japan) rate hike seemingly pushed back, dollar/yen has resumed its year-to-date rally and may soon hit fresh 2023 highs, especially if (Thursday's) U.S. CPI report comes in hotter than expected," said Matthew Weller, global head of research at FOREX.com and City Index.