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Markets resume risk-on rally, shrugging off US-China spat
CURRENCY traders regained their risk appetite on Wednesday, shrugging off US-China tensions and resuming the risk-on moves that have dominated since European Union leaders agreed on a fiscal stimulus plan on Tuesday.
Risk appetite in currency markets diminished for around two hours, after China's foreign ministry said the US had told China on July 21 to close its consulate in Houston, in Texas.
The move marked a deterioration in US-China relations, which have become more fraught since the outbreak of Covid-19. The headlines from Houston caught traders off-guard, said Westpac FX analyst Sean Callow, sparking fears that this latest dispute could be the one to halt the US-China trade deal, although he considers that unlikely.
The currency market's reaction was short-lived. The dominant mood remained optimistic, following the EU's agreement on a 750 billion-euro (S$1.2 trillion) recovery fund to share the debts incurred during the Covid-19 crisis. "For now, investors are still buying into the recovery story despite the building China-US tensions again and for now at least that still seems to be the path of least resistance," said Jeremy Stretch, head of G-10 FX strategy at CIBC Capital Markets.
After gaining on the US-China headlines, the dollar index resumed falling and was down 0.1 per cent at 95.028 at 1050 GMT. The last time it was this low was on March 9; before that it had not seen such lows since October 2018.
The euro - which has rallied since the EU recovery fund was first proposed in May - continued to gain, reaching a new high of US$1.1584, its strongest since October 2018.
The Australian dollar was up 0.3 per cent at US$0.71530 and the New Zealand dollar was up 0.4 per cent at US$0.6665. A flare-up of Covid-19 cases and the reintroduction of lockdown measures in Australia's second-largest state had little impact on the currency, even after reports that the latest virus outbreak will cut the country's third-quarter GDP growth by 0.75 percentage points.
The Chinese offshore yuan, which weakened past 7 per dollar on US-China headlines, was slower to recover, at 6.9954.
Meanwhile, sterling fell versus the dollar and euro, driven by a report in the Financial Times that the British government has abandoned hopes of clinching a free-trade deal with the US by the end of the year.
The dollar was weakened earlier in the session by concern about a delay to US fiscal stimulus, as Republicans and Democrats struggle to reach a consensus on the next round of stimulus. "Somehow, everything looks a little better for the euro than for the dollar. One-nil for it in the fight against the virus and the recession," Antje Praefcke, Commerzbank FX and EM strategist, wrote in a note to clients. REUTERS