US dollar nears one-year high as tensions grow

London

THE US dollar edged higher on Monday, closing in on last week's one-year high, as investors ramped up bets that escalating trade tensions between the US and its trade partners will hurt the world's biggest economy the least for now.

Tension is growing ahead of a July 6 deadline when Washington is due to impose US$34 billion of tariffs on Chinese exports, with two surveys of Chinese manufacturing out in the last few days showing a softening in activity, partly due to softness in exports.

"The dollar has begun to benefit from increased trade tensions as the relative economic impact of tariff measures comes into focus, with the US economy better insulated than the rest of the G-10," BNP Paribas strategists said.

Rising trade tensions have hit stock markets from Germany to South Korea and prompted investors to hedge their exposure to relatively high-yielding currencies such as the Australian dollar and the Chinese currency.

Taking note of the rising dollar, BNP Paribas trimmed its end-year forecasts for the euro and sterling for end 2018.

Latest positioning data remains broadly supportive for the dollar and is an extension of themes seen in currency markets in recent days.

Dollar longs edged higher for a second consecutive week, euro longs got trimmed again with net outstanding long positions at their lowest in nearly two months while the Swiss franc enjoyed some safe-haven support.

A rising dollar also translates into tightening financial conditions for broader financial markets given the US currency's dominance in global financing and trading markets.

The euro also received a setback after German Chancellor Angela Merkel was dealt a fresh blow when her interior minister offered to quit in an escalating row over migration policy.

On Monday, the single currency fell 0.5 per cent at US$1.1633 in early London trading. It racked up its third consecutive monthly loss against the dollar in June.

The dollar extended its gains against the yen to hit a new six-week high of 111.06 yen.

The Japanese currency was unmoved by the Bank of Japan's tankan business sentiment survey, which showed a slight dip in big Japanese manufacturers' sentiment.

The Australian dollar weakened 0.5 per cent against the greenback while the Canadian dollar slipped 0.3 per cent. REUTERS