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Euro, yuan lead surge after U.S.-China trade war truce

Mon, Dec. 3, 2018
LONDON - 3 December 2018: The euro and Australian dollar led the rally against the U.S. dollar on Monday after Washington and Beijing’s agreement for a ceasefire in their trade war encouraged investors to sell the greenback and buy into riskier assets.

A man is seen in front of a sheet of five Euro notes at the opening of the new Central Bank of Ireland offices in Dublin, Ireland April 24, 2017. REUTERS/Clodagh Kilcoyne
Emerging market currencies also surged higher, with China’s offshore yuan gaining more than one percent.

U.S. President Donald Trump and China’s President Xi Jinping have agreed a 90-day cease-fire in their trade dispute during which they will try to bridge their differences.

“Even though it’s a 90-days truce and both U.S. and China still need to sort out multiple issues in this period, from markets’ perspective getting past the event risk with a positive outcome and de-escalation of tensions is clearly positive for risk sentiment,” said Mayank Mishra, global macro strategist at Standard Chartered.

Currencies hit hard during the trade dispute amid fears of the potential damage to the global economy recovered sharply. The Australian dollar rocketed 1 percent to $0.7386 AUD=.

China is the biggest buyer of Australian exports and the worry has been that any hit to Chinese demand would hurt international trade.

The Canadian dollar rose 0.9 percent to C$1.3162 CAD=, while the Norwegian crown added 1 percent NOK= helped by the improved market sentiment and soaring oil prices.

The euro also capitalized on the dollar weakness, adding more than half a percent to $1.1379 EUR=. That takes the euro further away from its 2018 low hit last month of $1.1216.

The dollar index, which measures the greenback against a basket of major peers, fell 0.6 percent to a day’s low of 96.719 .DXY.

Trade tensions have been one of the biggest drivers of dollar strength in 2018.

“The reduction in global trade tensions has delivered a second successive blow for the U.S. dollar. It follows hot on the heels of the recent dovish shift in Fed communication,” MUFG analysts said, referring to recent comments from Federal Reserve officials that suggested the current interest rate hiking cycle may end sooner than expected.

The offshore yuan CNH=EBS gained more than one percent to 6.8790, although analysts said that with China's economy on less steady ground than a year ago relief for the yuan may be temporary.

Other emerging market currencies jumped. The South African rand ZAR= added 2 percent, while the Mexican peso MXN= was 1.8 percent higher. The Russian rouble RUB= added 1.1 percent.

Some analysts said many issues still have to be resolved for risk sentiment to remain supported in the medium term, with both China and the United States still on different pages when it came to trade.

Investors will also be focusing on U.S. monetary policy this week. The Federal Reserve is expected to raise interest rates by 25 basis points later in December but question marks remain about how many more hikes are due in the current cycle.

The Japanese yen JPY= slipped slightly to 113.48.
 
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