Dollar weakens on Brexit, shares sapped by weaker China growth

NEW YORK (Reuters) - The dollar posted its worst week in almost four months on Friday, pummelled by sterling and euro rallies driven by a deal on Britain’s departure from the European Union, while China’s weakest growth in nearly three decades weighed on equities.

The dollar crept lower against the euro as the common currency enjoyed a lift from hopes a Brexit deal could improve the odds of the euro zone avoiding a recession.

Dismal manufacturing data and worries the U.S.-China trade war could slow euro zone economies even further have rattled the euro this year, while fears of a disorderly Brexit had slammed sterling until a week ago.

“We can easily tell what’s driving the euro, and that’s a potential Brexit deal. We’re going to find out this weekend whether this is going to turn into a realty or whether it’s a pipe-dream,” said Paul Mendelsohn, chief investment strategist at Windham Financial Services in Charlotte, Vermont.

The euro EUR= rose 0.36% to an almost two-month high of $1.1162. Sterling GBP= climbed 0.42% to a fresh five-month high of $1.2942.

British Prime Minister Boris Johnson confounded his opponents on Thursday by clinching a new deal with the EU, even though the bloc had promised it would never reopen a treaty agreed on last year.

Parliament will vote Saturday on a deal that could lead shares in British-oriented businesses, such as housebuilders and retailers, to rocket to record highs if approved. Investors also predict the pound could rally about 5%.

Michael Hewson, chief market analyst at CMC Markets in London, said however members of parliament cast their vote, the Brexit saga is unlikely to be over.

“If MPs do hold their noses and vote for the deal, at least we can move on to phase 2 which is negotiating the new relationship over the next 14-month transition period,” he said.

Traders work on the floor at the New York Stock Exchange (NYSE) in New York, U.S., October 18, 2019. REUTERS/Brendan McDermid

Gloomy earnings reports from French carmaker Renault and food group Danone drove European shares lower while negative headlines about Johnson & Johnson and Boeing on Wall Street offset generally positive U.S. corporate earnings.

MSCI's gauge of stocks across the globe .MIWD00000PUS shed 0.24% while the FTSEurofirst 300 index .FTEU3 of leading European shares closed down 0.38%.

Bleak Chinese economic data also soured risk appetite, with the Shanghai Shenzhen index .CSI300 falling 1.2%.

Asian stocks stumbled after China’s third-quarter growth slowed more than expected to its weakest pace in almost three decades as the bruising U.S. trade war hit factory output. Gross domestic product (GDP) rose 6.0% year-on-year.

Wall Street also edged lower on worries about the global economy following China’s GDP data and J&J after it moved to recall a batch of baby powder.

J&J shares fell 6.2% while Boeing slid 6.79% after it turned over messages from 2016 between two employees that suggest the aeroplane maker may have misled U.S. aviation officials about a key safety system on the grounded 737 MAX.

Robust earnings from Coca-Cola Co KO.N and Schlumberger NV SLB.N, among others, helped mitigate the losses. Coke rose 1.84% and Schlumberger added 1.32%.

The Dow Jones Industrial Average .DJI fell 255.68 points, or 0.95%, to 26,770.2. The S&P 500 .SPX lost 11.75 points, or 0.39%, to 2,986.2 and the Nasdaq Composite .IXIC dropped 67.31 points, or 0.83%, to 8,089.54.

Euro zone bond yields rose a day before the Brexit vote. Yields have generally pushed higher since Irish and British leaders said a week ago they saw a path to a deal, boosting risk appetite and eroding demand for safe-haven assets such as bonds.

Germany's 10-year Bund yield was at -0.39% DE10YT=RR, after touching its highest since late July on Thursday.

U.S. Treasury yields fell as investors awaited Saturday's Brexit vote, with the benchmark 10-year U.S. Treasury note US10YT=RR up 1/32 in price to push yields down to 1.7501%.

Oil prices edged lower as concerns about China’s economy outweighed bullish signals from its refining sector.

Benchmark Brent crude oil futures LCOc1 settled down 49 cents to $59.42 a barrel. U.S. West Texas Intermediate (WTI) crude CLc1 futures fell 15 cents to settle at $53.78 a barrel.

Gold steadied, helped by a weaker dollar. U.S. gold futures GCv1 settled 0.3% lower at $1,494.10 an ounce.

Reporting by Herbert Lash; Editing by Chris Reese and Tom Brown