December 2, 2018 / 11:56 PM / 8 days ago

Dollar weakens as US-China trade truce revives demand for riskier currencies

SINGAPORE (Reuters) - The dollar fell across the board on Monday as investor demand for riskier assets rose after China and the U.S. agreed to a cease-fire in a trade dispute that has shaken global markets.

FILE PHOTO: A U.S. Dollar note is seen in this June 22, 2017 illustration photo. REUTERS/Thomas White/Illustration/File Photo/File Photo

The White House said on Saturday that President Donald Trump told China’s President Xi Jinping at the G20 talks in Argentina that he would not boost tariffs on $200 billion of Chinese goods to 25 percent on Jan. 1 as previously announced.

China and United States will try to bridge their differences via new talks aimed at reaching a deal within 90 days.

Riskier currencies such as the Australian dollar AUD= and New Zealand dollar NZD= rallied by more than 0.5 percent each, while safe haven currencies such as the yen JPY= and the Swiss franc CHF= traded weaker in early Asian trade, signalling a clear risk-on move in the financial markets.

“The trade truce is definitely risk positive for the markets...we expect dollar safe haven buying to fade and riskier currencies such as the Aussie and Kiwi dollar to scale higher,” said Rodrigo Catril, senior currency strategist at NAB.

Catril noted that crosses such as the Aussie/yen and kiwi/yen are likely to see further upside as currency traders react to the temporary truce between the world’s two largest economies.

The dollar index .DXY, a gauge of its value versus six major peers, traded down 0.13 percent at 97.14.

The dollar lost 0.54 percent versus the offshore yuan CNH=, its steepest percentage fall since Oct. 1, to quote at 6.9134.

The safe-haven yen JPY= weakened to 113.68 on Monday, with the greenback gaining 0.2 percent, reflecting the prevailing risk-on mood. The euro gained 0.34 percent EURJPY= on the yen to 128.89, briefly hitting an intra-day high of 129.37, its highest level since Nov. 9.

The euro EUR= changed hands gained 0.16 percent to $1.1333 amid heavy dollar selling.

However, some analysts warned many issues had to be resolved for risk sentiment to stay positive in the medium term.

“Ultimately, it remains a high order for China to fulfil the U.S. demands on structural issues...at a time when the major issues that the U.S. has raised represent a challenge to China’s rise, a long-lasting and meaningful de-escalation remains very challenging,” said Daniel Been, head of currency research at ANZ.

Apart from trade, investor focus will also return to the U.S. monetary policy, with the Federal Reserve expected to raise interest rates by 25 basis points later in December, which would be its fourth rate hike this year.

“The developments over the weekend will give the Fed some more confidence to raise rates in 2019,” said Michael McCarthy, chief market strategist at CMC markets.

The dollar had come under pressure last week when the market took comments by Federal Reserve Chair Jerome Powell as hinting at a slower pace of rate hikes.

Powell is scheduled to testify before a congressional Joint Economic Committee later this week.

The British pound traded weaker versus the dollar at $1.2740 losing around 0.1 percent of its value. Sterling has posted losses for three consecutive weeks as traders bet that British Prime Minister Theresa May will not be able to pass her Brexit deal through parliament on Dec. 11.

Reporting by Vatsal Srivastava, editing by Eric Meijer

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