FOREX-Dollar strengthens on China-US deal optimism, Aussie gains on CPI

By Kevin Buckland

TOKYO, Oct 29 (Reuters) - The dollar rose from a one-week low versus major peers on Wednesday on signs that the United States and China are on track to sign a deal that would pause tougher U.S. tariffs and China's rare-earth export curbs.

U.S. President Donald Trump said in a speech in South Korea, where he is scheduled to meet Chinese counterpart Xi Jinping on Thursday, that he thought they would get a "great deal" done for both sides, while sources told Reuters that China's state-owned COFCO bought three U.S. soybean cargoes this week in another sign of denouement.

The dollar's strength "may be some kind of relief from the Trump tariff festival," said Bart Wakabayashi, Tokyo branch manager at State Street.

"The dollar has been sold quite a bit for an extended period of time, so I do think there's more of a market mechanism that at some point it's going to rebound, and it can be overly reactive."

Currency traders are also keeping a close eye on central banks, particularly the U.S. Federal Reserve, which is widely expected to cut interest rates later in the day.

Both the European Central Bank and the Bank of Japan are expected to hold rates steady on Thursday.

The Aussie dollar AUD= reversed an earlier decline to rise 0.3% to $0.6606 after hotter-than-expected quarterly consumer price data threw into doubt a rate reduction from the Reserve Bank of Australia next week, or even at the following meeting in December.

"The earliest the (RBA board) will be in a position to get more comfort on inflation is with the next quarterly print ahead of the February 2026 meeting," said Luci Ellis, chief economist at Westpac.

"Even a February cut is far from certain now, given the size of the upside surprise (for inflation) this quarter."

The U.S. dollar index =USD, which measures the currency against six rivals, rose 0.2% to 98.899 after two straight days of declines that took it to the lowest since October 21 at 98.562 on Tuesday.

The euro EUR= eased 0.2% to $1.1631. Sterling GBP= declined 0.3% to $1.3238.

The dollar rose 0.1% to 152.275 yen JPY=.

The greenback earlier fell against Japan's currency after U.S. Treasury Secretary Scott Bessent posted on X that the Japanese government's "willingness to allow the Bank of Japan policy space will be key to anchoring inflation expectations and avoiding excess exchange rate volatility."

ALL EYES ON FED MEETING

Bessent, who was in Japan with Trump for talks with the newly formed government of Prime Minister Sanae Takaichi, has repeatedly criticised the BOJ for its slow pace of rate hikes.

Takaichi, viewed as a fiscal and monetary dove, has asked the BOJ to maintain an easy monetary environment, but has said the conduct of monetary policy is up to the central bank.

While the BOJ is widely expected to hold rates steady on Thursday, the focus will be on any clues on the potential for a hike at its next meeting in December.

Expectations for near-term tightening have risen since the last meeting in September after one additional board member dissented in favour of a hike, taking the total to two. More officials have adopted hawkish stances in recent speeches, suggesting a shift in posture among the overall board.

However, BOJ Governor Kazuo Ueda's unswervingly cautious tone has led market participants to expect the next rate increase in December or January, rather than this week.

"The possibility of three dissenting votes at the upcoming meeting could prompt markets to price in faster and more sizable rate hikes, ... exerting downward pressure on USD/JPY," said Shoki Omori, chief desk strategist at Mizuho Securities.

"While the prevailing market consensus points to one or two additional rate increases, a scenario in which the terminal policy rate rises further cannot be discounted."

The Fed, meanwhile, is widely expected to cut rates by a quarter point later on Wednesday, and traders will be looking for signs that the market's expectations for a December reduction and several more next year are warranted.

Market pricing indicates rate reductions are expected in October and December, with two more by July of next year.

"The interest is in the guidance provided by Chair Jerome Powell at his press conference," said Kyle Rodda, an analyst at Capital.com. "A lot of dovishness is baked into the curve," he said. "Anything that upsets that pricing could lead to volatility."