US dollar hits 11-month high amid trade conflict

London

THE dollar hit an 11-month high against a basket of its rivals on Wednesday as an escalating trade conflict kept investors from buying higher-yielding currencies and markets braced for growing volatility.

Currency markets had breathed a sigh of relief after Beijing signalled its tolerance of a stronger currency by fixing a stronger daily midpoint than expected. Safe-haven currencies such as the Swiss franc and the Japanese yen were still well-supported, though.

At 1200 GMT on Wednesday, the dollar traded flat against a basket of its rivals at 95.09, its highest since mid-July 2017.

"Market volatility remains very low and the headline risks from trade concerns should push that higher," said Hans Redeker, global head of currency strategy at Morgan Stanley in London.

Led by the US Federal Reserve, global central banks are pulling back from their financial-crisis policies, and market expectations are for volatility to pick up.

Morgan Stanley estimates that FX volatility remains one standard deviation below its long-term average. US bond market volatility was more than 1.5 standard deviations below its long- term average.

A gauge of perceived equity market swings rose to a two-week high of 14.64 vol on Tuesday before pulling back.

The euro slipped a quarter of a per cent, with traders wary of pushing it higher before some large option expiries this week. In addition, European Central Bank policymaker Ewald Nowotny said on Wednesday the euro weakness was caused by the growing interest rate differential between the United State and Europe.

Roughly US$2 billion of currency options on the euro/dollar are set to expire this week between US$1.1550 and US$1.1500, dampening any large moves in the cash markets.

Emerging currencies won some reprieve, with the Mexican peso stronger on the day along with the Taiwan dollar and the South African rand The Australian dollar, considered sensitive to shifts in sentiment towards China, fell to a 13-month low of US$0.7347 on Tuesday before pulling back slightly to US$0.7388.

The Swiss franc slipped 0.2 per cent to 0.9962 franc per dollar, handing back the previous day's gains.

Before Thursday's Bank of England policy decision, the pound struggled near a seven-month low of US$1.3151. REUTERS