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US dollar gives up gains as trade deal optimism fades

London

THE US dollar gave up earlier gains as some of the optimism over a US-China trade agreement faded on Tuesday.

The US currency had jumped to a two-week high against the safe-haven Japanese yen in Asian trading.

The euro held steady versus the US dollar even though the mood among German consumers rose unexpectedly heading into December, suggesting that household spending will continue to prop up growth in Europe's biggest economy at the end of the year.

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Chinese Vice-Premier Liu He, US Trade representative Robert Lighthizer and US Treasury Secretary Steven Mnuchin discussed issues related to phase one of a trade agreement and agreed to maintain communication on remaining issues.

On Monday, China's Global Times said the two countries were very close to a phase-one deal.

The US dollar was last trading neutral at 108.98 yen, after rising as high as 109.205, its highest since Nov 12.

The euro was also flat versus the US dollar at US$1.1017 , not far from the 11-day low of US$1.1004 it reached on Monday.

Prices in the derivatives market showed that market participants do not expect big moves in the common currency.

One-month euro/US dollar implied that volatility has fallen to 4.15/4.40 per cent, the lowest in five years. Three-month volatility fell to a record low of 4.4/4.6 per cent, suggesting that traders do not see the main currency pair diverging from current levels.

The Chinese yuan - the currency most sensitive to the US-China trade war - had risen to a one-week high of 7.0181 against the US dollar, but was last trading at 7.0399.

"China and US agreed on a framework to resolve their phase-one issue, which is just a way of saying that they did admin work," said Sebastien Galy, senior macro-strategist at Nordea Asset Management.

The next deadline for market participants to watch is Dec 15, according to analysts. That is when the US threatened to impose 15 per cent tariffs on US$160 billion of imports from China.

Last week, the Chinese government invited Mr Lighthizer and Mr Mnuchin to Beijing for face-to-face talks, The Wall Street Journal reported.

However, MUFG analysts believe that US dollar/yen does not hold much upside potential going forward given the the 10-year US Treasury bond yields have fallen to around 1.75 per cent from 1.97 per cent earlier this month. REUTERS