January 2, 2020 / 12:01 AM / 20 days ago

Dollar bounces after end-2019 selloff, yuan shrugs off policy easing

(Reuters) - The dollar snapped a six-day losing streak to add 0.25% on Thursday, the first trading day of 2020, pushing the euro off five-month highs while the offshore yuan shrugged off reserve ratio cuts that could add $115 billion worth of liquidity.

FILE PHOTO: U.S. one hundred dollar notes are seen in this picture illustration taken in Seoul February 7, 2011. REUTERS/Lee Jae-Won/

Trading may remain thin until Tuesday, when most European countries open after Monday’s Epiphany holiday but market players will be relieved the dollar navigated the holiday period without experiencing the money market squeezes many had feared.

The dollar index slumped 0.4% on New Year Eve as large banks took only a small portion of the $150 billion offered by the U.S. Federal Reserve’s overnight repo operation and borrowing costs fell to the lowest level since March 2018.

While wariness remains that there could be a repeat of last January’s “flash crash”, when massive stop-loss selling swept through holiday-thinned markets, analysts said the Fed’s liquidity injections had reduced the risk.

“There’s nothing fundamental...at the end of last year the dollar sold off quite sharply so we are seeing an easing in some of the dollar selling pressure,” said Lee Hardman, senior FX strategist at MUFG.

“The liquidity squeeze didn’t materialise so that’s contributing to stability in broader financial markets...But the dollar story has been turning negative in recent months, partly because of action taken by the Fed to ease dollar liquidity,” Hardman said, referring to the U.S. central bank’s balance sheet expansion re-launched in October.

Having ended December almost 2% lower against a basket of currencies, the dollar inched up to 96.65 while against the euro it was at $1.119, knocking the single currency from its highest level since early August of $1.1249.

The greenback index ended 2019 almost flat.

The Chinese yuan closed at 6.9631 to the dollar, its strongest close since Aug. 2, and also firmed offshore after small downward moves triggered by Wednesday’s move to cut the amount of cash that banks must hold, releasing $115 billion worth of funds to support the economy.

The move had been widely expected following Premier Li Keqiang’s pledge last month to unleash more stimulus.

Investors are now waiting for the U.S. ISM manufacturing survey due on Friday. Across much of Asia and Europe, final purchasing managers indexes painted a slightly brighter picture, with French, German and euro zone readings a touch better than advance PMIs.

But they also confirmed an 11th straight month of contracting euro zone activity.

The euro slipped 0.2%, having strengthened 1.8% against the dollar last month. However, euro zone bond yields extended their rise and inflation expectations rose to the highest since July.

“Higher bond yields are likely to keep the euro’s micro-rally going, wildfires will keep a lid on Aussie dollar, and PMIs and oil are supporting Norwegian, Swedish and Canadian currencies,” Societe Generale told clients.

The Swedish crown briefly firmed 0.3% against the euro after PMIs rose in December following three months of declines, although they still languished in contraction territory.

The Norwegian crown inched to 3-1/2 month highs after firmer PMIs, also benefiting from firmer crude prices.

The Australian dollar slipped 0.3%.

U.S. President Donald Trump said on Tuesday that Phase 1 of a trade deal with China would be signed on Jan. 15 at the White House. Markets are waiting for further details

Reporting by Sujata Rao; Editing by Frances Kerry, Kirsten Donovan

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