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Investing.com – The U.S. dollar retreated in early European trade Tuesday, with risk sentiment helped by China’s short-term lending rate cut, although the upcoming U.S. inflation data and Federal Reserve policy meeting has resulted in a degree of uncertainty.

At 03:15 ET (07:15 GMT), the , which tracks the greenback against a basket of six other currencies, traded 0.3% lower to 102.888, falling to levels last seen in mid-May.

Chinese yuan slips after rate cut

rose 0.1% to 7.1548, with the yuan retreating to a six-month low after the People’s Bank of China cut its seven-day reverse repo rate by 10 basis points to 1.90% from 2.00%, its first such rate cut since the bank trimmed its in August 2022.

This has been taken as a sign that the Chinese authorities are determined to maintain a loose monetary policy in an attempt to boost the country’s flagging recovery from its COVID hit, boosting risk sentiment globally at the wider expense of the safe-haven dollar.

U.S. inflation to point to Fed pause

Focus now turns to the latest release of U.S. later Tuesday, which is expected to show inflation cooled slightly in May and could give the room to pause its aggressive rate-hike cycle when it announces its interest rate decision on Wednesday.

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Analysts expect prices for May to rise 4.1% over the year, a slowing in pace from the 4.9% growth in April, while , which strip out volatile food and energy, are expected to rise 5.3% for the year, down from 5.5%.

PIMCO is underweight the dollar

The dollar could have difficulty appreciating much in the near future, if the view of investment management company PIMCO is widespread.

“There’s no guarantee that we’re going to be short the dollar all the time, but today, (in) positioning we have dollar underweights versus G10 and EM (emerging markets),” Andrew Balls, chief investment officer for fixed income at the $1.8 trillion asset manager said Monday.

“My guess is on average, we’re going to have that over the next couple of years.”

Euro gains ahead of ECB decision

rose 0.3% to 1.0793, after were confirmed at 6.1% on the year for May.

This represents a fall in the annual rate from 7.2% the prior month but is unlikely to stop the lifting its interest rates by 25 basis points again on Thursday.

Elsewhere, rose 0.4% to 1.2563, with officials pointing to further interest rate hikes if remains elevated.

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“It’s important we continue to lean against the risks of inflation momentum, and therefore that further increases in interest rates cannot be ruled out,” Bank of England policymaker Jonathan Haskel wrote in a column published Monday. “

drifted lower to 139.53, with the expected to maintain its ultra-loose monetary policy later this week, while risk-sensitive rose 0.3% to 0.6774.

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