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Trade tensions keep FX markets on edge as euro steadies

London

THE euro stabilised on Monday after last week's big losses but the threat of an escalating global trade war, a dispute in Germany's governing coalition and a more dovish-than-expected ECB all weighed on the single currency. After suffering its biggest drop in a month after the European Central Bank said it would keep rock-bottom interest rates on hold through the summer of 2019, the euro slipped again on Monday before recovering slightly to trade up 0.1 per cent on the day at US$1.1621, off its recent lows of US$1.1543.

A decision by the US on Friday to enact tariffs on US$50 billion in Chinese goods was the latest salvo in a widening trade dispute between the world's biggest economies, keeping broader markets on edge.

China's official Xinhua news agency said Beijing would impose 25 per cent tariffs on 659 US products.

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Currency reaction outside of specific highly trade-dependent Asian countries has been limited so far, but the worry for investors is that these tit-for-tat developments will eventually hurt global growth. A broader trade conflict would be particularly troubling for Europe given that President Donald Trump has signalled that he wants to slap tariffs on vehicles.

Tensions in the governing coalition in Germany also weighed on the euro.

"The euro has been on the back foot since the ECB decision and today's bounce does little to change the broader picture of the caution," said Lefteris Farmakis, a macro strategist at UBS in London. "The next thing that markets will be watching for is the flash PMIs (Purchasing Managers Index) later this week that will shed some light on the narrative that the eurozone economy is doing well. If they disappoint, expect more selling in euro/dollar." French, eurozone and German flash PMIs are due on Friday.

The dollar index traded flat at 94.756, below the seven-month peak touched on Friday after the US Fed raised interest rates for the second time in 2018 last week and signalled its growing confidence in the economy.

Reflecting the growing concerns over the widening trade dispute, the Chinese yuan fell to its weakest since mid-January at 6.4595 yuan per dollar in the offshore market.

Analysts are divided about the impact of a trade battle on the greenback but many think it could boost the dollar if reduced trade raises inflation, forcing the Fed to hike rates more than what markets expect.

The yen strengthened slightly versus the dollar. It rose 0.1 per cent to 110.48 yen. The Swiss franc also rose. Commodity-linked currencies briefly sagged on the back of sliding crude oil prices. The Canadian dollar traded to as weak as C$1.3208 per dollar, close to Friday's one-year low of C$1.3210, before recovering to C$1.3169. The Australian dollar rose 0.1 per cent to US$0.7448 after plumbing a five-week low of US$0.7426. REUTERS