The dollar broadly weakened on Monday as investor demand for riskier assets rose after China and the United States agreed to a ceasefire in their trade war that has shaken global markets.
The White House said on Saturday that President Donald Trump told China’s President Xi Jinping at the G20 talks in Argentina that he would not raise tariffs on $200 billion of Chinese goods to 25 per cent on Jan. 1 as previously announced.
China and the United States will attempt to bridge their differences via new talks aimed at reaching a deal within 90 days.
Riskier currencies such as the Australian dollar and New Zealand dollar rallied 0.75 per cent and 0.5 per cent, respectively, while safe haven currencies such as the yen weakened in early Asian trade, signalling a clear risk-on move in financial markets.
“The trade truce is definitely risk positive for the markets…we expect dollar safe haven buying to fade and riskier currencies such as the Aussie and kiwi to scale higher,” said Rodrigo Catril, senior currency strategist at NAB.
Catril noted that crosses such as the Aussie/yen and kiwi/yen are likely to see further upside as currency traders react to the truce between the world’s two largest economies.
The dollar index, a gauge of its value versus six major peers, traded down 0.36 per cent to 96.92.
The dollar lost 0.55 per cent versus the offshore yuan, to quote at 6.9109. In onshore trade, the yuan traded at 6.9164.
The greenback lost 1.2 per cent versus the South African rand and 1.4 per cent against the Mexican peso as traders shunned the world’s most liquid currency to put on riskier bets.
The safe-haven yen traded marginally lower at 113.45 on Monday. It had hit an intra-day low of 113.85, reflecting the prevailing risk-on mood.
The euro gained 0.3 per cent on the yen to 128.84, briefly hitting an intra-day high of 129.37, its highest since Nov. 9.
The euro gained 0.3 per cent to $1.1350 amid heavy dollar selling.
However, some analysts warned many issues still have to be resolved for risk sentiment to stay positive in the medium term.
“A lot will depend on developments in the next 90 days, but given the US and China are on different pages, we don’t think the optimism can last. We reiterate trade wars need to be framed in terms of who hurts the least and see the G20 meeting as a stronger win for the US,” said Sue Trinh, head of Asia EM FX strategy at RBC Capital Markets, in a note.
Apart from trade, investor focus will also return to US monetary policy, with the Federal Reserve expected to raise interest rates by 25 basis points later in December, which would be its fourth rate hike this year.
“The developments over the weekend will give the Fed more confidence to raise rates in 2019,” said Michael McCarthy, chief market strategist at CMC markets.
The dollar had come under pressure last week when the market took comments by Fed Chairman Jerome Powell as hinting at a slower pace of rate hikes.
Powell is scheduled to testify before a congressional Joint Economic Committee later this week.
“We believe that Powell has simply toned down his hawkish tilt seen in October, with the Fed on track to deliver a hike, the fourth this year, at the FOMC meeting on 19 December, as well as another four increases in 2019,” Philip Wee, currency strategist at DBS, said in a note.
The British pound gained marginally versus the dollar to $1.2760. Sterling has posted losses for three consecutive weeks as traders bet that British Prime Minister Theresa May will not be able to pass her Brexit deal through Parliament on Dec. 11.
The greenback lost ground versus commodity currencies such as the Canadian dollar and Norwegian crown, as crude oil prices soared on Monday.
The greenback lost 0.52 per cent versus the loonie, changing hands at C$1.3215.