US dollar retreats as risk appetite returns at year-end

[NEW YORK] The US dollar weakened across the board on Friday as optimism about the outlook for a US-China trade deal lifted investors' appetite for risk, sapping safe-haven demand for the greenback, in light end-year trading.

The dollar index, which measures the greenback against six other major currencies, was 0.6 per cent lower at 96.951.

"The dollar has declined against a backdrop of coursing risk-on sentiment in global equity markets with investors anticipating the US-China Phase 1 trade deal to be signed-off on soon, which will come amid a world of expansive monetary policy and benign inflation," analysts at Action Economics said in a note.

Traders returned from their Christmas and Boxing Day break to digest comments from Beijing that it was in close contact with Washington about an initial trade agreement. Earlier, US President Donald Trump had talked up a signing ceremony for the recently struck Phase 1 trade deal.

With Friday's loss, the dollar index's gains for the year have shrunk to under 1 per cent, putting it on pace for the smallest annual change in six years.

On Friday, the euro rose 0.76 per cent to hit a 10-day high, its best day in nearly five months.

"The EURUSD is particularly sensitive to global growth upgrades, and with trade optimism swinging positively for global growth, the Euro's trend-following dynamics could start to argue for a push above," Stephen Innes, chief Asia market strategist at AxiTrader, said in a note.

Bleak European economic data had prompted hedge funds to bet on a weaker euro during 2019, but some strength in recent Eurozone data, along with weakness in other currencies, has lifted the euro.

The common currency has risen 2.3 per cent against the greenback so far this quarter.

On Friday, trade-sensitive currencies were stronger, with the Australian dollar rising 0.53 per cent and the New Zealand dollar up 0.52 per cent.

The offshore yuan was about flat on the day against the US currency at 6.9917 yuan per US dollar.

The Canadian dollar was trading 0.4 per cent higher against the greenback at 1.3069 to the US dollar, or 76.49 US cents. The commodity linked currency has strengthened in recent sessions helped by higher oil prices.

Sterling was 0.78 per cent higher after European Commission President Ursula von der Leyen said the European Union may need to extend the deadline for talks about a new trade relationship with Britain.

Even with the recent UK general election smoothing the path for Britain's exit from the European Union, Britain's ability to strike a new trading deal between the EU in a relatively short span of time remains a concern for some investors.

"We anticipate that the Brexit rubber hitting the road will curtail the pound's upside potential in 2020," analysts at Action Economics said.

REUTERS