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US dollar backtracks on trade concerns

London

THE US dollar gave up early gains and fell on Monday while emerging market currencies slipped nearly half a per cent as investors waited for the next salvo in the trade war between the United States and China.

US President Donald Trump is likely to announce new tariffs on about US$200 billion of Chinese imports as early as Monday, a senior official told Reuters. The tariffs will probably be about 10 per cent, less than the 25 per cent that the administration had considered.

The news pushed the US dollar index up nearly half a per cent last Friday to 95, its biggest daily rise since Aug 23.

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It briefly held on to those gains in early Monday trading before shedding nearly a quarter of a per cent to 94.75.

"Trade wars continue to dominate investors' minds, and markets are wary of taking big positions; but overall, there is little going on in currency markets," said Manuel Oliveri, a currency strategist at Credit Agricole in London.

A widely read Chinese newspaper said that China would not be content only to play defence in an escalating trade war with the United States. Both countries have already levied duties on US$50 billion worth of each other's goods.

The US dollar has benefited from safe-haven flows as the trade conflict has worsened. Strong US data also helped, but some market watchers believe that those flows may be ending after tepid US inflation data last week.

Positioning is starting to reflect that. Speculators began unwinding some of their short bets against the euro and sterling last week. Encouraging developments in Brexit negotiations helped as well.

Net long positions fell to US$19.2 billion, the lowest since mid-July, according to calculations by Reuters and Commodity Futures Trading Commission (CFTC) data released last Friday.

Emerging markets remained under pressure with an index tracking them down by nearly half a per cent on Monday, not far above a 15-month low hit last week.

Reduced risk appetite was also visible in European currencies with the euro/Swiss franc cross down by 0.1 per cent.

Notwithstanding recent positive headlines around Brexit negotiations, the cross has declined nearly 2 per cent so far this month, suggesting that investors have been reducing risky positions. REUTERS