Dollar drops to four-week low as U.S.-Mexico trade deal dims safe-haven appeal

NEW YORK (Reuters) - The dollar fell to a four-week low on Monday, as risk appetite improved and investors unwound some safe-haven bets on the currency after the United States and Mexico reached a trade deal.

U.S. Dollar notes are seen in this June 22, 2017 illustration photo. REUTERS/Thomas White/Illustration

The greenback had already been pressured by Federal Reserve Chairman Jerome Powell’s comments on Friday that seemed to suggest a slower pace of monetary tightening.

The trade deal with Mexico extended those losses.

The United States and Mexico agreed to replace the North American Free Trade Agreement, or NAFTA, and talks with Canada were expected to begin immediately in hopes of reaching a final agreement by Friday, a senior U.S. trade official said.

That boosted the Mexican peso MXN= and Canadian dollar CAD=D3 against the greenback, rising 0.8 percent and 0.5 percent respectively, and lifted risk appetite across financial markets.

“The outlook for NAFTA seems to have brightened – but major uncertainties remain and the probability that a new agreement is announced in the coming days remains quite low,” said Karl Schamotta, director of global product and market strategy, at Cambridge Global Payments in Toronto.

In late afternoon trading, the dollar index .DXY, was down 0.4 percent at 94.768, after slipping more than 0.5 percent in the previous session.

The dollar was also undermined by expectations of a more gradual pace in the Fed’s rate increases, as investors digested Powell’s comments.

At a symposium in Jackson Hole, Wyoming, Powell on Friday emphasized the central bank’s push to raise interest rates despite U.S. President Donald Trump’s criticism of higher borrowing costs. But he also said the Fed sees no clear sign of inflation accelerating above 2 percent.

His comments did little to change market expectations for rate hikes in September and December and disappointed some dollar bulls hoping for a more hawkish message.

Since hitting a more than one-year high in mid-August, the dollar has fallen about 2.3 percent after Trump criticized the Fed for raising interest rates at a time when the government was trying to stimulate the economy.

“The takeaway from Jackson Hole is that the Fed may not look to tighten much more than is currently priced into markets,” said Mark McCormick, North American head of FX strategy at TD Securities in Toronto.

Interest rate hike expectations have supported the dollar this year as the U.S. economy tracked a stable growth path.

The Treasury yield curve USUS10=TWEB on Monday reached its flattest since 2007 - a factor seen as reducing support for the dollar - in the wake of Powell's speech.

The euro rose 0.5 percent to $1.1677 EUR= after climbing as high as $1.1693, a four-week peak. The currency advanced more than 0.7 percent on Friday.

(The story has been refiled to fix typo in lead paragraph to “the” instead of “he”.)

Reporting by Gertrude Chavez-Dreyfuss; Editing by Dan Grebler and Richard Chang