The U.S. dollar strengthened Wednesday on rising optimism of a U.S.-China trade deal easing trade tensions, while traders awaited the latest Federal Reserve rate decision.

At 05:20 ET (09:20 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.3% higher to 98.787, bouncing after two straight days of declines.

Trump signals trade deal

U.S. President Donald Trump’s tour of Asia has moved to South Korea, where he is scheduled to meet Chinese counterpart Xi Jinping on Thursday.

Optimism surrounding a trade deal between the world’s two largest economies has been boosted by the U.S. president saying that he thought they would get a "great deal" done for both sides.

Trump has suggested the two could secure an agreement that would see the U.S. reduce its currently elevated levies on China in exchange for a promise from Beijing to halt exports of fentanyl precursor chemicals.

Trump added that he may talk about Nvidia’s (NASDAQ:NVDA) cutting-edge Blackwell AI chips with Xi. U.S. export restrictions keeping Nvidia from selling its most advanced AI processors to China have been one source of contention in trade negotiations.

That said, any gains are small with the Federal Reserve widely expected to announce a 25 basis-point rate cut later in the session.

Investors are also looking for a signal from Fed Chair Jerome Powell that policymakers will continue cutting into the year’s end, given concerns about a weakening labor market.

“The ingredients for another ‘buy the rumor, sell the fact’ dollar rally are all there,” said analysts at ING, in a note. “So, while risks are slightly tilted to the upside for USD today, any rally should be smaller and shorter-lived than in September. The likely announcement of the end of QT could also limit USD upside.”

Euro slips ahead of ECB

In Europe, EUR/USD fell 0.2% to 1.1623, with the single currency slipping back ahead of Thursday’s European Central Bank meeting, although the central bank is widely expected to keep interest rates unchanged.

“The implications for EUR/USD are likely to be limited, and today’s FOMC should be the only input – if anything – for direction in the pair,” said ING. “We see some modest upside risks for the USD. That may not be enough to take EUR/USD sustainably below 1.160, though, and the short-term outlook for the pair remains neutral.”

GBP/USD slipped 0.5% to 1.3202, while USD/CAD was flat at 1.3947 ahead of the Bank of Canada’s rate decision later in the session.

“Markets are largely pricing in a cut, but it will be hard for the BoC to shut the door to more easing given the worsening trade picture,” added ING. 

Yen awaits BOJ meeting 

In Asia, USD/JPY traded 0.1% higher to 152.24, with the yen close to its weakest levels in eight months, amid growing conviction that the Bank of Japan will not hike rates in the near-term.

The BOJ meets on Thursday, and is widely expected to leave rates unchanged as it grapples with bets on looser Japanese fiscal policy under new Prime Minister Sanae Takaichi.

Takaichi’s election earlier this month has acted as a major weight on the yen, as markets bet that the conservative politician will ramp up fiscal spending and oppose more monetary tightening by the BOJ. 

USD/CNY traded marginally higher at 7.0995, and of Thursday’s Trump-Xi meeting, which is expected to yield a further deescalation in a trade conflict between the world’s largest economies.

Trump told reporters on Wednesday that he was open to lowering his fentanyl-related tariffs on China during the meeting, and will also discuss rare earths and artificial intelligence chips, specifically those of Nvidia, during the meeting. 

AUD/USD gained 0.4% to 0.6611, climbing to a near three-week high after hotter-than-expected consumer inflation data reduced expectations for more interest rate cuts by the Reserve Bank of Australia.