Dollar dives as trade war hits US economy

New York

THE dollar fell on Friday from a two-year high against a basket of major currencies after orders for US-made capital goods fell, further evidence that manufacturing and the broader economy are slowing, due in part to the US-China trade dispute.

The weaker-than-expected data, a closely watched proxy for business spending plans, drove the dollar lower and added to a fall which began last Thursday following a report that showed manufacturing activity hit its lowest level in almost a decade in May. Taken together, the reports suggested that a sharp slowdown in US economic growth is under way, which could affect the dollar's safe-haven status.

The dollar index was down 0.27 per cent at 97.587. It was also 0.80 per cent off a two-year high of 98.371 hit in the previous session.

Some analysts initially believed that a trade war would be a boon for the US dollar - both because the currency serves as a safe haven in times of uncertainty and because the US was likely to be hurt the least, but that has not proven to be true.

"The IMF suggests that US import tariffs are mainly paid for by US companies, depressing their profit margins. Hence, it should not be surprising to see US capex plans being cut radically, which should soon translate into moderating labour market conditions," wrote Hans Redeker, global head of foreign exchange strategy at Morgan Stanley.

China on Friday denounced US Secretary of State Mike Pompeo for fabricating rumours after he said the chief executive of China's Huawei Technologies was lying about his company's ties to the Beijing government.

Escalating trade tensions and weak data have fuelled rate cut expectations by the US Federal Reserve. Money markets now broadly expect one rate cut by October followed by another by January 2020.

"In the current circumstances, we strongly suspect that further escalation in protectionism will lead the Fed to consider easing policy," wrote Michael Hanson, head of global macro strategy at TD Securities. "Increases in inflation should be relatively short-lived, while the hit to growth could be more persistent."

Dollar weakness also helped boost sterling from a 41/2 month low, though the rally was primarily driven by UK Prime Minister Theresa May's announcement on Friday that she would quit after failing to deliver a Brexit deal. The pound was last up 0.5 per cent at US$1.272.

The euro was also stronger on Friday, up 0.24 per cent to US$1.121, benefiting from the dollar's weakness and from the Dutch part of the EU parliamentary elections. REUTERS