Dollar eases as trade deal prospects bolster risk, sterling gains

February 18, 2019

By Vatsal Srivastava

SINGAPORE (Reuters) – The dollar was marginally weaker on Monday, as increasing expectations of a U.S.-Sino trade deal led investors to shift away from the safety of the greenback into riskier assets.

Both the United States and China reported progress in five days of negotiations in Beijing last week, although the White House said much work remains to be done to force changes in Chinese trade behavior.

Negotiations will continue next week in Washington as investors hope for an end to the trade war between the world’s two largest economies.

“Trade is the big focus for the markets…with talks shifting from Beijing to Washington, we could get more news flow,” said Michael McCarthy, chief markets strategist at CMC Markets.

“I expect the euro to remain under pressure this week while dollar/yen could also fall if we see risk-aversion based on negative trade news flow.”

In Asia, the yen was marginally higher versus the greenback at 110.53.

The Aussie gained 0.1 percent to $0.7144, after gaining 0.48 percent on Friday on hopes of a trade breakthrough between the United States and China. The kiwi dollar also gained around 0.1 percent on the dollar to $0.6868.

U.S.-China trade tensions have kept markets highly volatile since last year.

U.S. duties on $200 billion worth of Chinese imports are set to rise from 10 percent to 25 percent if no deal is reached by March 1 to address U.S. demands that China curb forced technology transfers and better enforce intellectual property rights.

The dollar index, a gauge of its value versus six major peers was marginally lower at 96.85. The index has gained 1.4 percent so far this month despite weaker-than-expected U.S. data as well as a cautious Federal Reserve which is widely expected to keep rates steady this year due to a slowdown in growth and muted inflation.

The dollar index has gained mainly because of the euro, which has around 58 percent weightage in the index.

The single currency was flat at $1.1292 in early Asian trade and has had two straight weeks of losses. Traders are betting on a weaker euro in the coming months as they expect the European Central Bank to keep its monetary policy accommodative due to low growth in the common area, tepid inflation and political uncertainties.

On Friday, Benoit Coeure, a member of the European Central Bank’s executive board, said a new round of cheap multi-year loans to banks was possible. Coeure added that the euro zone’s recent economic slowdown is more pronounced than earlier expected, suggesting the path of inflation will also be more shallow.

The ECB will next meet on March 7 and policymakers are widely expected to slash growth and inflation projections as the euro zone is suffering its biggest slowdown in half a decade.

Elsewhere, sterling was up by 0.1 percent to $1.2903, building on its gains from Friday.

The pound rallied 0.6 percent on Friday, helped by reports of some hedge fund buying, a conciliatory tone on Brexit from the Irish foreign minister and stronger-than-expected British retail sales data.

(Editing by Jacqueline Wong)

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