LONDON, March 1 (Reuters) – The dollar fell on Wednesday after China’s manufacturing activity expanded at the fastest pace since April 2012, while China’s yuan edged up, while regional German price data weighed on inflation in the euro. Worry increased.

The Australian and New Zealand dollars were also among the beneficiaries of strong Chinese economic data, which trounced expectations, with the official manufacturing purchasing managers’ index (PMI) shooting up to 52.6 last month from 50.1 in January.

Similarly, China’s non-manufacturing activity grew at a sharp pace in February, while the Caixin/S&P Global Manufacturing PMI reading for the previous month similarly beat market expectations.

The onshore yuan ended the domestic session at 6.8854 per dollar, its strongest close since February 21, while the offshore yuan jumped 1% to 6.8811 per dollar, set for its biggest one-day gain since late November .

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“The data confirms expectations that the growth outlook in China has improved significantly, so it is positive for risk sentiment,” said Niels Christensen, principal analyst at Nordea.

“It has put the dollar on the defensive.”

The kiwi rose 0.9% to $0.6242, while the aussie rose 0.5% to $0.6762, hitting a two-month low on Wednesday following soft domestic economic data.

Antipodean currencies are often used as liquid proxies for the yuan.

Meanwhile, data from Germany’s most populous state, North Rhine-Westphalia, showed consumer prices rose 8.5% year-on-year last month, up from 8.3% in January.

Data from the 16 German states is used to calculate the headline inflation figure for Germany. More regional consumer price data is released through the European morning before pan-German data is published at 1300 GMT.

Data released on Tuesday showed inflation accelerated in France and Spain, the euro zone’s two biggest economies, raising expectations of a rate hike by the European Central Bank (ECB).

The euro was up 0.7% to $1.0650 against the dollar.

“The euro is being well supported by inflation data,” said Nordea’s Christensen.

“We are looking for a more solid euro area inflation reading tomorrow than we expect going into this week.”

Sterling rose 0.5% to $1.2081, having gained 1% earlier in the week after Britain hammered out Northern Ireland’s post-Brexit trade deal with the EU.

British Prime Minister Rishi Sunak was in Northern Ireland and then met his own MPs on Tuesday to sell the new deal.

Against a basket of currencies, the US dollar index <=USD> fell 0.6% to 104.36.

The index had risen nearly 3% in February, its first monthly gain after a four-month streak, as strong US economic data in recent weeks raised market expectations that the Federal Reserve would hike rates.

Futures pricing currently suggests a peak in the fed funds rate of around 5.4% by September.

“We see the Fed going as high as 5.5% with a risk rising to 6%,” said Michael Avery, global strategist at Rabobank. “The Fed is hiking. Others can’t follow or match. The dollar will climb.”

Elsewhere, the dollar fell 0.17% to 136 against the Japanese yen, having gained nearly 5% against the yen in February, its biggest monthly gain since last June.

Reporting by Samuel Indik and Rae Vee; Editing by Jacqueline Wong, Christian Schmollinger and Kim Coghill

Our Standards: Thomson Reuters Trust Doctrine.

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