Risk appetite returns as Evergrande fears ebb

London

THE risk-sensitive Australian dollar rallied and the safe-haven yen dipped to a nearly three-month low on Monday, as fears of widespread market contagion from indebted China Evergrande Group receded.

Rising commodity prices also helped the Aussie and Norway's krone, while the yen was pressured as higher US yields attracted Japanese investor money.

The euro traded little changed at US$1.1707, largely ignoring developments in German elections at the weekend, with the Social Democrats projected to narrowly defeat the CDU/CSU conservative bloc.

The dollar index, which measures the US currency against six major rivals, hovered in the middle of its range of the past week, trading slightly higher at 93.40.

"It seems to be pretty much a continuation of last week, high-betas performing well, havens lagging behind the pack, with the FX market really just following the improvement in sentiment that we have seen more broadly - stocks snapping a two-week losing run and yields rising quite sharply," said Michael Brown, senior market analyst at Caxton FX.

US yields climbed to their highest since the start of July in anticipation of tighter US monetary policy after the Federal Reserve announced last week that it may start tapering stimulus as soon as November and flagged interest rate increases may follow sooner than expected.

"USD is likely to remain caught in the cross-currents of a more hawkish FOMC and fading concerns around a potential Evergrande default," Commonwealth Bank of Australia analysts wrote in a client note.

Concerns that Evergrande, China's second-largest developer, could default on its US$305 billion of debt have overshadowed trade in recent weeks, but some of those contagion fears are receding. The People's Bank of China injected a net 100 billion yuan (S$20.9 billion) into the financial system on Monday, adding to the net 320 billion yuan last week, the most since January.

The yen weakened as far as 110.99 per US dollar, matching a low on July 6, before trading slightly stronger from the end of last week at 110.645.

The Aussie climbed 0.37 per cent to US$0.72835, up from US$0.72205 a week ago, its lowest since Aug 24.

The Norwegian krone gained about 0.4 per cent and touched 8.5493 per US dollar for the first time since July 6. The Canadian dollar added about 0.3 per cent to C$1.2622 per greenback. REUTERS