The dollar rose to a two-week high against a basket of major currencies on Thursday, encouraged by a rebound on Wall Street and signs the United States may negotiate a resolution to a trade dispute with China. Beijing on Wednesday imposed tariffs on key US imports including soybeans, planes, cars, beef and chemicals in response to similar measures from the United States. That prompted a rally in the yen, often sought in times of market turmoil, and left investors broadly reluctant to take on new positions in risk assets as US shares tumbled.
But the dollar on Thursday recouped losses after President Donald Trump's economic adviser said the US administration was negotiating with China, not engaging in a trade war. "Moderation and negotiation seems to be next on the agenda ... the fallout in the foreign exchange market remains muted," said Hans Redeker, global head of currency strategy at Morgan Stanley in London.
The dollar rose 0.1 percent against a basket of six major currencies to 90.20. In a broader sign that global currency markets had not been rattled, a basket of currency options of the major currencies ticked towards 2018 lows of 7.8 after a spike in February. Currency markets generally dislike trade intervention, and previous protectionist efforts by the US government have weakened the dollar.
Perhaps the biggest risk for the US currency is a possible exodus of capital, analysts said. "For the dollar right now I see a lot more risk to the downside than upside. With the current political atmosphere in Washington there's a lot more still to come from this," said Jeremy Cook, head of FX strategy at WorldFirst.
While transfers out of dollar-based assets can take years if not decades because of the greenback's status as the world's premier reserve currency, recent trends among central banks and sovereign wealth funds indicate a slow shift. The US dollar's share of currency reserves reported to the International Monetary Fund declined in the final quarter of 2017 to a four-year low, latest data showed. Any significant rise in risk sentiment would outweigh any short-term advantage the dollar would have against emerging markets in its role as a safe-haven bet, Cook said.
In the midst of the US-China trade tension, the dollar has weakened in three of the last five sessions against the yen, down more than 5 percent so far this year. Against the Swiss franc, the greenback has fallen 1.4 percent so far in 2018. The Japanese and Swiss units are viewed as safe-haven currencies and tend to benefit at the dollar's expense in times of geopolitical and financial tension. Beyond the potential trade war, investors are also focused on US data this week, including a jobs report on Friday, for signs how steady economic fundamentals are.
The dollar on Thursday rose 0.3 percent to trade at 107.08 yen and the Australian dollar was down 0.3 percent at $0.7691 despite stronger local data. The euro edged down 0.2 percent to $1.2258, adding to the previous day's modest gains.
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