By Hannah Lang

WASHINGTON (Reuters) – The dollar was flat on Tuesday after China said it would scrap its COVID-19 quarantine rule for inbound travelers – a major step in reopening its borders, even as COVID cases spike.

China will stop requiring arriving travelers to go into quarantine starting Jan. 8, the National Health Commission said on Monday. At the same time, Beijing downgraded regulations for managing COVID cases to the lighter Category B from the top-level Category A.

The offshore yuan fell 0.13% to $6.9653 per dollar.

“We’ve been in a very narrow trading range, and I think with the dollar firming up against the euro and yen, we could see further dollar gains against the Chinese currency,” said Marc Chandler, chief market strategist at Bannockburn Global Forex.

Still, investors could be cheered by what some perceive to be “Chinese policymakers’ resolve to full reopening”, said Christopher Wong, a currency strategist at OCBC.

“There seems to be no let-up in the pace of relaxing COVID restrictions despite the surge in COVID cases in the mainland.”

Elsewhere, the euro rose 0.13% against the dollar to $1.0649.

China’s gradual dismantling of its economically-damaging zero-COVID policies may give an additional boost to the euro – which has clawed higher thanks to the European Central Bank taking a much harder line on inflation than investors had expected.

The Aussie rose 0.18% versus the greenback at $0.674 in mostly thin trading during the year-end holiday season, while the New Zealand dollar gave up earlier gains, easing by 0.17% to $0.628. The two currencies are often used as liquid proxies for the Chinese yuan.

With UK markets closed for a public holiday, trading in sterling was muted, leaving the pound down against the dollar at around $1.2031.

The U.S. dollar index was flat at 104.080.

Data released on Friday showed U.S. consumer spending barely rose in November while inflation cooled further, reinforcing expectations that the Federal Reserve could scale back its aggressive monetary policy tightening.

Joseph Trevisani, senior analyst at FXStreet.com, noted historical patterns suggest that investors next month will likely take profits from the recent rallies in the euro and the yen, which could prop up the dollar in the short term.

“Although I think the trend is still dollar weaker, because of the market’s perception of what the Fed is going to do, as opposed to what it says it’s going to do, you’re still liable to get some pullback in January,” he said.

The Japanese yen fell 0.35% against the dollar to 133.32, despite a surge in short-term government bond yields to their highest in over seven-and-a-half years, following an auction that attracted relatively weak demand.

Still, the yen is heading for its biggest quarterly rally against the dollar since 2008, with a rise of 8.1%, following a surprise decision last week by the Bank of Japan (BOJ) to adjust its monetary policy.

BOJ Governor Haruhiko Kuroda on Monday dismissed the chance of a near-term exit from ultra-loose monetary policy, even as markets and policymakers are signaling an increasing focus on what comes after Kuroda’s tenure ends in April next year.

In cryptocurrencies, bitcoin was last down 1.21% at $16,626.72, while ether last fell 0.81% to $1,207.10.

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Currency bid prices at 2:15PM (1915 GMT)

Description RIC Last U.S. Close Pct Change YTD Pct High Bid Low Bid

Previous Change

Session

Dollar index 104.0800 104.1000 -0.01% 8.799% +104.4000 +103.8800

Euro/Dollar $1.0651 $1.0635 +0.15% -6.31% +$1.0670 +$1.0612

Dollar/Yen 133.3300 132.8500 +0.37% +15.83% +133.5850 +132.6400

Euro/Yen 141.99 141.32 +0.47% +8.97% +142.2700 +141.1500

Dollar/Swiss 0.9287 0.9315 -0.28% +1.84% +0.9329 +0.9270

Sterling/Dollar $1.2032 $1.2068 -0.29% -11.03% +$1.2112 +$1.2005

Dollar/Canadian 1.3520 1.3575 -0.41% +6.92% +1.3578 +1.3485

Aussie/Dollar $0.6738 $0.6732 +0.06% -7.33% +$0.6776 +$0.6726

Euro/Swiss 0.9892 0.9908 -0.16% -4.60% +0.9924 +0.9877

Euro/Sterling 0.8849 0.8814 +0.40% +5.35% +0.8863 +0.8801

NZ $0.6284 $0.6271 +0.25% -8.16% +$0.6318 +$0.6270

Dollar/Dollar

Dollar/Norway 9.8115 9.8500 -0.37% +11.40% +9.8725 +9.7990

Euro/Norway 10.4531 10.4625 -0.09% +4.40% +10.5035 +10.4378

Dollar/Sweden 10.4539 10.4871 -0.17% +15.92% +10.5023 +10.4167

Euro/Sweden 11.1383 11.1574 -0.17% +8.84% +11.1638 +11.1068

(Reporting by Hannah Lang in Washington; Additional reporting by Amanda Cooper in London and Rae Wee; Editing by Andrew Heavens, Mark Heinrich and Chizu Nomiyama)