May 8, 2020 / 8:48 AM / 22 days ago

FOREX-U.S.-China trade progress boosts higher-risk currencies

* Aussie gains to one-week high

* U.S. dollar clipped by falling bond yields

* Investment sentiment solid in early trading

* Graphic: World FX rates in 2019 tmsnrt.rs/2egbfVh

LONDON, May 8 (Reuters) - Currencies closely linked to global trade rose on Friday boosted by news that U.S. and Chinese negotiators had agreed to strengthen cooperation over a trade deal and as more governments slowly reopened their economies.

Top U.S. and Chinese trade representatives discussed their Phase 1 trade deal on Friday with China saying they agreed to improve the atmosphere for its implementation and the United States saying both sides expected obligations to be met.

The discussion in a telephone call comes amid escalating tension between the countries, exacerbated U.S. criticism of China’s handling of the novel coronavirus outbreak.

The Australian dollar, which is closely correlated with sentiment towards China and the global economy, rose 0.3% to $0.6516 after earlier hitting a one-week high.

Several emerging markets currencies were also higher.

Australia will ease social distancing restrictions implemented to slow the spread of the coronavirus in a three-step process, Prime Minister Scott Morrison said on Friday, with the aim of removing all curbs by July.

Some analysts, however, were nervous about the Aussie.

“It is not only uncertain how deep the collapse of the economy turned out to be but also when the recovery is going to come and how pronounced it is going to be ... The uncertainty thus remains high and the Aussie vulnerable,” said Commerzbank analyst Thu Lan Nguyen.

The U.S. dollar struggled for direction as investors defied a broader sense of doom around upcoming U.S. employment data and focused on the trade news and gradual lifting of lockdowns.

The U.S. currency was undermined by a further hit to its yield attraction as U.S. money markets priced in a small chance of negative interest rates next year.

“The possibility of negative rates is modestly bearish for the dollar, given limited market pricing to date and ongoing concerns about the US ‘debasing’ the dollar,” wrote Ebrahim Rahbari, chief G10 FX strategist at Citi in New York.

But he added forceful and aggressive U.S. fiscal and monetary stimulus was likely to boost the recovery in the United States and pull in capital flows, supporting the dollar.

The dollar’s index against a basket of six other major currencies was unchanged at 99.851.

The dollar’s retreat against riskier currencies reflected a recovery in risk appetite as global shares rallied, with the Nasdaq index now wiping out its losses this year.

On top of aggressive monetary easing around the world, hopes of economic normalisation are supporting the mood.

The euro was 0.1% lower at $1.0823, but held above Thursday’s near two-week low of $1.07665 though it was down more than 1% on the week.

Against the yen, the dollar bounced back to 106.32 yen , above a seven-week low of 105.985 touched on Wednesday. (Reporting by Tommy Reggiori Wilkes Additional reporting by Hideyuki Sano in Tokyo. Editing by Jane Merriman)

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