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Dollar slips as trade tensions raise rate cut expectations

London

THE dollar weakened across the board on Wednesday as growing concerns about the escalating trade dispute between China and the United States prompted investors to raise their expectations of a US rate cut later in the year.

Unlike previous episodes of trade tensions when the dollar benefited from an increase in trade tensions between the world's two biggest economies, US President Donald Trump's latest threat to raise tariffs on Chinese imports have prompted market strategists to focus on the corrosive impact on Washington.

"US policymakers have made it clear that the next step for the central bank will be based on incoming economic data and markets are expecting a rate cut will materialise sooner than later if trade tensions escalate further," said Ricardo Evangelista, a senior analyst at ActivTrades in London. Against a basket of its rivals, the dollar weakened 0.1 per cent to 97.50. Market expectations for a rate hike stand at about 80 per cent before the end of the year.

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Data earlier showed China's trade surplus with the US, a major irritant for Washington, expanded to US$21.01 billion in April from a month ago, a factor that might provoke a hardening stance from US officials. Focus is on trade talks on Thursday and Friday in Washington, where Chinese Vice-Premier Liu He will try to salvage a deal that would avoid a sharp increase in tariffs on Chinese goods scheduled to take effect on Friday. The Chinese yuan in the offshore market edged 0.1 per cent lower to 6.8037 and within striking distance of a four-month low hit on Monday.

The prospects of an escalation rather than a resolution of the spat between the US and China has seen the yen gain in recent days, with the currency up 0.2 per cent against the dollar at 110.07 yen, taking its gains to more than one per cent so far this month.

The New Zealand dollar was a notable loser overnight after the central bank cut benchmark cash rates to 1.5 per cent from 1.75 per cent. The kiwi was last off 0.1 per cent, recovering somewhat after falling to US$0.6525 in the immediate aftermath of the rate cut, its lowest since last November.

Elsewhere, the euro was up 0.1 per cent at US$1.1213, but holding within recent ranges as currency traders were still undecided on the inflationary outlook for the eurozone economy and the latest developments on the trade war front. "The European Central Bank is likely to keep a close eye on the renewed escalation of the trade war as the real economic consequences could be considerable, affecting its monetary policy," Commerzbank strategists said.

The pound fell for a third day, edging down half a per cent to US$1.3052 on signs that talks between Britain's government and the main opposition Labour Party to break the Brexit deadlock may soon collapse. REUTERS