Euro, sterling rise on hopes of China COVID policy relief

Risk-sensitive sterling and euro rose on Tuesday against the weakening safe haven U.S. dollar amid hopes of a potential easing in China's strict pandemic restrictions following an unprecedented episode of unrest in the country.

News that China will speed up COVID-19 vaccinations for elderly people aiming to overcome a key stumbling block in efforts to ease unpopular "zero-COVID" curbs supported the yuan, while weakening the U.S. dollar against major currencies.

"People are getting quite excited about some sort of reopening," said Alvin Tan, head of Asia FX strategy at RBC Capital Markets.

The U.S. dollar, which rallied in the previous session on mounting worries over China's COVID-19 situation, fell 0.4% to 106.19.

The offshore yuan surged 1% to 7.1777 a dollar. The onshore yuan was up 1% at 7.1732 per dollar.

Risk-sensitive sterling strengthened 0.5% to $1.2017, while the euro was up 0.34% at $1.0375, not far from a five-month peak of $1.0497 hit on Monday.

The Aussie, often used as a liquid proxy for the yuan, rose 1.35% to $0.6743. The kiwi similarly gained 1.4% to $0.6248.

The Japanese yen last traded about 0.7% higher at 137.98 per dollar.

Police on Monday stopped and searched people at the sites of weekend protests in Shanghai and Beijing, after crowds there and in other Chinese cities demonstrated against the country's strict zero-COVID policy.

Protests have spread to at least a dozen cities around the world in a show of solidarity.

EURO ZONE INFLATION

Euro zone inflation data due on Wednesday was also in focus after data showed inflation in Spain and Germany came in below expectations.

Flash euro zone inflation figures for November are due on Wednesday, with economists polled by Reuters expecting inflation to come in at 10.4% year-on-year.

European Central Bank President Christine Lagarde said overnight that euro zone inflation had not peaked and it risked turning out even higher than currently expected, hinting at a series of interest rate hikes ahead.

Francesco Pesole, FX strategist at ING, said the consensus is for euro zone inflation to show signs the surging in price is slowing.

"It's difficult to see this significantly altering the ECB's narrative, but an above-consensus print may prompt markets to seriously consider a 75 basis point hike in December".

The greenback remained marginally supported by hawkish Federal Reserve speakers overnight.

St. Louis Fed President James Bullard said the Fed needed to raise interest rates quite a bit further, while New York Fed President John Williams and Richmond Fed President Thomas Barkin echoed similar views.

Comments from Fed Chair Jerome Powell on Wednesday will be watched for new signals on further tightening, with key U.S. jobs data for November due on Friday. The U.S. central bank is widely expected to hike rates by an additional 50 basis points when it meets on Dec. 13-14.