Dollar Falls as US-China Trade Truce Drives Risk Sentiment

The dollar edged lower on Monday after the 90-day truce between China and the US helped drive investor demand for riskier assets, weakening safe-haven demand for the greenback.

The US dollar index, a gauge of the dollar’s value against a basket of six major peers, shed 0.1 percent to $97.018.

The news led riskier currencies like the Australian dollar New Zealand dollar climbing 0.9 percent to 0.7378 and 0.8 percent to 0.6927 respectively.

The euro also rose 0.1 percent to 1.1328 against the dollar, while the British pound gained 0.2 percent to 1.2783, before shedding 0.3 percent to 1.2702.

The sterling has traded in the red for three straight weeks as traders expect the Brexit deal by British Prime Minister Theresa May will not go through the Parliament on December 11.

Against the yen, the dollar was down 0.03 percent to 113.54. The pair hit an intraday low of 113.85, reflecting the current risk-on mood.

Despite a positive risk sentiment, some analysts have cautioned that there are still several issues that needed to be resolve to maintain optimism in the medium term.

Head of Asia EM FX strategy Sue Trinh stated that a lot will depend on developments in the next 90 days, but given the US and China are on different pages, they do not think the optimism can last.

They reiterate trade wars need to be framed in terms of who hurts the least and the G20 meeting as a stronger win for the US.

China, US Agree to a Ceasefire in Trade War

US President Donald Trump and Chinese President Xi Jinping agreed in the weekend to call off their trade war momentarily, resulting in an arrangement that would see both parties put their plans to levy additional duties on each other’s goods on pause, as negotiations between the two countries continue.

The White House announced on Saturday that Trump told Xi during a meeting in Argentina of the Group of 20 (G20) leading economies that he would not hike tariffs on $200 billion of Chinese products to 25 percent on January 1 as previously planned.

China and the US have agreed that they will attempt to have a deal completed within the next 90 days, although the White House warned that if at the end of the given period the two countries are unable to establish a deal, the 10 percent tariffs will be raised to 25 percent.

During the 90-day period, Chinese and US officials will continue to discuss remaining disagreements on technology transfer, intellectual property, and agriculture.

Fed Rate Hike
Apart from trade, investors will also eye the US monetary policy, with the Federal Reserve expected to hike interest rates by 25 basis points later this month, marking its fourth hike in 2018.

The developments over the weekend will give the central bank more confidence to raise rates next year, said Chief Market Strategist Michael McCarthy.

The dollar weakened last week when the market took the statement of Fed Chair Jerome Powell as a sign of slower rate increases. Powell is due to testify before a congressional Joint Economic Committee this week.

Currency strategist Philip Wee said they believe 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 Federal Open Market Committee (FOMC) meeting on December 19, as well as another four rate hikes in 2019.

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