US$ strengthens broadly; yen edges up before US-Japan trade talks

London

THE dollar gained against most major currencies on Thursday as investors bet that trade war rhetoric and a strong US economy would continue to aid the currency.

Trade tensions are seen as beneficial for the US dollar as the economy is better placed to handle protectionism than emerging markets, and tariffs may narrow the US trade deficit.

But the dollar's gains have been more pronounced against emerging-market currencies because an escalation in the US-China trade war would hit their export-oriented economies harder.

The dollar index, which tracks the dollar versus a group of six currencies, was up 0.2 per cent at 95.345. It rose to a year-high of 95.652 on July 19 but has since struggled to break much above the 95.5 level.

In an apparent reflection of concern among investors about an uptick in geopolitic tensions, including the US-China trade war and Brexit, the Japanese yen rose broadly before falling against a rebounding dollar.

Global foreign exchange markets this summer have been dominated by political angst from US sanctions on Russia and Turkey to rising tensions in the Middle East and in Europe.

"Politics continues to wreak short-term havoc in global FX markets. . . where we're questioning whether any currency is truly safe," said Viraj Patel, a currency strategist at Dutch bank ING.

Investors were focused on US inflation data due out on Thursday, though few expect it to alter the pace of US interest rate hikes.

"There's very little scope for further fed tightening. Today the market is being driven by risk aversion, ranges are very tight," said Manuel Oliveri, a currency strategist at Credit Agricole in London.

Traders are also focusing on talks in Washington on Thursday in which Japan will seek to avert tariffs on its car exports and fend off US demands for a bilateral free-trade agreement.

This year's global trade row has seen the safe-haven Japanese yen - which appreciates in times of political uncertainty - stay resolutely weak, falling about four per cent against the dollar over the past six months.

That has prompted speculation that the yen's depreciation could be an issue in Thursday's talks. President Donald Trump has voiced concern over countries deliberately weakening their currencies.

The yen on Thursday rose to a 10-day high against the dollar of 110.76 before relinquishing its gains to trade down 0.2 per cent at 111.175.

The euro remained in the red at US$1.15920, edging back down towards a 2018-low of US$1.15080.

Sterling on Thursday continued to slide and hit US$1.2842 following a drop to US$1.2854 the previous day, its lowest in a year.

The pound is weakening as investors ramp up bets that Britain will leave the European Union without an agreement with Brussels on their future relationship.

A big mover was the New Zealand dollar, which fell more than 1 per cent at US$0.6652, its lowest since March 2016. The kiwi tumbled after the Reserve Bank of New Zealand (RBNZ) on Thursday unexpectedly committed to keeping interest rates at record lows through to 2020 on disappointing economic activity, a dovish turn that caught markets off-guard. REUTERS