THE US DOLLAR FALLS SLIGHTLY AHEAD OF THE INFLATION .

US CURRENCY DECLINES A LITTLE BIT BEFORE THE INFLATION REPORT

The U.S. dollar declined slightly on Wednesday as investors awaited the release of the U.S. consumer prices report on Thursday, which would provide insight into the Federal Reserve's monetary policy. The dollar initially experienced larger losses after data revealed that China's economy had entered a deflationary period last month, increasing the likelihood of additional stimulus measures from China. The yuan also strengthened against the dollar due to reported selling of dollars by state-owned Chinese banks. The focus now shifts to Thursday's U.S. inflation data, with economists predicting a 4.8% increase in the year-on-year core consumer price index for July. The dollar index slipped 0.1% to 102.

In other currency news, the euro rose 0.2% to $1.0976, while sterling slid 0.2% to $1.2721. European markets gained after equities tumbled the day before as the Italian government announced a surprise 40% windfall tax on banks. Italy's finance ministry clarified that the tax would not amount to more than 0.1% of the banks' total assets.

In China, consumer prices fell for the first time in more than two years in July, reinforcing the view that the Chinese government might take steps to underpin the economy with monetary stimulus.

There were also more dovish signals from Fed officials, with some suggesting that interest rates are already high enough. However, other officials have indicated that further rate hikes are likely.

The dollar rose 0.2% against the yen, reaching 143.70 yen. Analysts predict that if Thursday's U.S. CPI report comes in hotter than expected, the dollar/yen pair may hit fresh highs for the year.