Dollar heads towards 6-month highs

London

THE dollar on Tuesday edged towards a six-month high hit last week as the latest bout in a trade war between the US and its commercial partners prompted selling in emerging market currencies, but gains were capped before a summit this weekend.

Markets were also awaiting data that might confirm the US economy is on track for a strong June quarter, lifting Treasury yields as well as giving the dollar an additional boost.

"I am surprised the latest round of trade tariffs hasn't fuelled a bigger drop in other currencies as this basically signals inflationary pressures will rise in the US and prompt the Fed to raise interest rates more," Commerzbank FX strategist Esther Maria Reichelt said.

Against a basket of currencies, the dollar climbed 0.1 per cent at 94.13. It hit 95.02 last week, its highest since early November 2017, and has risen more than 5 per cent since mid-April.

The Mexican peso and the Canadian dollar led losers against the dollar as trade war concerns linger.

Mexico said it will impose a 20 per cent tariff on US pork imports after US President Donald Trump slapped tariffs on steel and aluminium.

The tariff was in response to the Trump administration's decision last week to impose steel and aluminium tariffs on Mexican exporters on grounds that countries including Mexico engage in competition damaging to US national security.

The US decision to go ahead with the steel and aluminium tariffs has complicated talks with Mexico and Canada to rework the North America Free Trade Agreement (Nafta). ING strategists said in a note the latest moves by Mexico might prompt Mr Trump to pull out of Nafta altogether.

With correlations between short-dated US bond yields and the dollar strengthening to their strongest since January 2017, investors have responded by buying the greenback in recent days, especially against the euro and emerging market currencies.

Short-dated US Treasury yields are up by about 20 basis points in a week, pushing two-year government yields to 2.50 per cent and within a whisker of a decade high of the 2.59 per cent hit last month.

"The dollar is perched around some important levels and its strength can be judged from the fact that the euro/dollar has failed to break above the US$1.17 line despite falling Italian political concerns," Societe Generale strategist Kenneth Broux said. REUTERS