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Aussie firms on Sino-US trade optimism; yen drifts lower

Singapore

THE Australian dollar strengthened on Monday on expectations of progress in trade talks between China and the US, although market sentiment remained fragile over looming concerns of slowing global growth and a partial US government shutdown. The Australian dollar gained 0.3 per cent to US$0.7063. The fortunes of the Australian economy are closely tied to China, its largest trading partner.

"High beta and emerging market currencies will outperform if we get a trade agreement. Given the likelihood of improving risk sentiment following the trade deal and some underlying weakness in the US economy, I would consider positive trade developments as negative for the dollar," said Sim Moh Siong, currency strategist at Bank of Singapore.

The increasing strain on China's factories underscores expectations Beijing will step up stimulus measures to support the economy, which will keep the yuan under pressure. The dollar was marginally higher versus the offshore yuan at 6.8803 in Asian trade.

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The dollar index, a gauge of its value versus six major peers was steady, fetching 96.44 in early Asian trade. The US currency has been weakening in recent weeks due to rising expectations that the Federal Reserve will pause its tightening cycle sooner than expected. Falling US bond yields have also dampened investor sentiment towards the dollar.

US 10-year Treasury bond yield was last at 2.71 per cent on Monday, having fallen around 30 basis points in December. Despite recent pressure on the greenback, the dollar index has gained 4.6 per cent in 2018 primarily due to a robust US economy, falling unemployment and rising wage pressures. These strong fundamentals allowed the Federal Reserve to raise interest rates four times in 2018, with analysts now expecting possibly another one to two hikes if economic momentum does not falter.

The yen was changing hands at 110.47 per dollar, falling by 0.15 per cent versus the greenback. It has gained around 2 per cent on the dollar this year. The Japanese currency has strengthened in the last two weeks of the year on its perceived safe-haven appeal due to growing concerns of slowing economic growth, US-Sino trade tensions and highly volatile global equities.

The Swiss franc, another safe haven, was steady at 0.9844. The franc has gained versus the dollar for two straight weeks due to risk-off positioning in the currency markets.

The euro quoted at US$1.1440, was flat versus the dollar. Although the single currency has gained versus the greenback in recent weeks, economic growth and inflation in Europe remain much weaker than the European Central Bank's expectations. The euro is set to lose around 4.5 per cent versus the dollar in 2018.

Elsewhere, sterling, which has been battered this year due to Brexit woes, was fetching US$1.2700, down 0.14 per cent. The pound has lost 6 per cent of its value versus the dollar this year. REUTERS