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Dollar weaker post G20 trade truce, but focus returns to Fed

Dollar weaker post G20 trade truce, but focus returns to Fed

Tue Dec 04 2018


The dollar weakened against its major peers on Tuesday, as the thaw in trade tensions between Washington and Beijing supported investor confidence though concerns about the fragility of the US-China truce capped wider gains in risk assets.


Currencies such as the Australian dollar and the Chinese yuan, which were battered by the Sino-US trade war, are expected to remain strong versus the greenback in the coming weeks as investor sentiment improves.


“For now, it seems China has got the best out of G20 and we expect the yuan and the Aussie dollar to remain supported,” said Nick Twidale, chief operating officer at Rakuten Securities. However, Twidale warned that the markets still need to see a further easing in trade tensions for the risk-on rally to continue.


Investor confidence in currency markets has been bolstered by an agreement on Saturday between Washington and Beijing at the G20 summit in Argentina calling for a 90-day trade tariff truce.


The Australian dollar was marginally higher in Asian trade. The Reserve Bank of Australia hold its policy meeting later on Tuesday at which it is expected to keep interest rates on hold.


The dollar fell 0.16 per cent against the offshore yuan to 6.8631. On Monday, it lost 1.07 per cent, its steepest percentage fall since August 25. The dollar index, a gauge of its value versus six major peers, was off 0.1 per cent at 96.94.


Analysts now expect market focus to swing away from trade issues to the US Federal Reserve's monetary policy. For most of 2018, the dollar had been supported by a robust US economy and a relatively hawkish Fed, which is widely expected to raise interest rates later this month. Markets have priced in an 87 per cent probability of a rate hike at the Fed's December 18-19 meeting.


The dollar came under pressure last week when the market took comments by Fed Chair Jerome Powell as hinting at a slower pace of rate hikes. Powell is scheduled to testify before a congressional Joint Economic Committee, the date of which is yet to be confirmed.


A more dovish tone from the Fed last week has led markets to question how many times the central bank will hike rates in 2019.


“Given data remains strong, we think the Fed will hike twice in 2019 and that's more than what the market is pricing in right now...we remain moderately bullish on the dollar,” added Twidale.


Investors are also keeping a close eye on US 10-year treasury yields, which are now sitting a little below 3 per cent. Overnight, the US yield curve inverted for the first time in a decade. The two-10-year yield curve is a key focus for investors as an inversion is seen as predictor of a US recession.


The yen traded at 113.31, with the greenback losing 0.3 per cent versus the Japanese currency.


Elsewhere, sterling was marginally lower at $1.2724. On Monday, the pound fell below $1.27 for the first time since October 31. 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 December 11.




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