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CURRENCIES

Dollar steady after Powell says Fed may raise rates

London

THE dollar steadied on Monday as risk sentiment improved following reassuring Federal Reserve comments and signs that US and Mexican negotiators were homing in on a common position on the North American Free Trade Agreement (Nafta).

At a symposium at Jackson Hole, Wyoming, Fed chair Jerome Powell on Friday emphasised the central bank's push to raise interest rates despite President Donald Trump's criticism of higher borrowing costs.

The Treasury yield curve reached its flattest level since 2007 - a factor seen as reducing support for the dollar - in the wake of Mr Powell's speech. His comments did little to change market expectations for rate hikes in September and December and disappointed some dollar bulls hoping for a more hawkish message.

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Market voices on:

"Some in the market were wrongfooted because they thought the Fed might shift towards an auto-pilot mode (approach to rate hikes) as it did in 2004. Obviously, Mr Powell prefers a gradual approach," said Ulrich Leuchtmann, head of FX and emerging market research at Commerzbank AG in Frankfurt. "The return of risk appetite is negative for the dollar and its safe-haven appeal."

Adding to the risk-on mood, US and Mexican trade negotiators appeared close to reaching a common position on Nafta, with Mexico's economy minister saying on Sunday that talks had "continued to make progress".

"There is growing optimism that a US/Mexican agreement can be reached . . .which in turn would allow Canada to re-join talks and progress to be made overall," said Kit Juckes, foreign exchange strategist at Societe Generale. "We're never more than a tweet away from disaster on trade negotiations but for now, there's optimism."

A prospective US deal with Mexico "takes a little bit of global trade war risk off the table", said Robert Carnell, chief economist and head of research, Asia-Pacific at ING.

The euro was little changed at US$1.1607 after going as high as US$1.1654, its strongest since Aug 2. The single currency advanced more than 0.7 per cent on Friday. The Chinese yuan extended its rally in the onshore market to as high as 6.8061 per dollar, its strongest since Aug 8. The yuan had surged about 0.8 per cent in onshore trade on Friday after the People's Bank of China said it was adjusting its methodology for fixing the yuan's daily midpoint, amid broad dollar strength and ongoing trade tensions between Washington and Beijing. REUTERS