Euro, sterling hold steady on Brexit hopes; dollar drifts lower

SINGAPORE: The euro and sterling steadied versus the dollar on Friday after Britain and the European Union agreed in principle to a text setting out their future relationship before a summit on Sunday.

Traders initially cheered the draft declaration agreed by the United Kingdom and the European Commission overnight which said that the "parties envisage having a trading relationship on goods that is as close as possible, with a view to facilitating the ease of legitimate trade."

The euro and sterling traded marginally higher on Friday, looking to extend their overnight gains of 0.2 percent and 0.8 percent respectively.

"A full read through of the text suggests a lot of important details need to be clarified. ...this document is not convincing the market that it will pass through parliament," said David de Garis, director economics and markets at NAB.

He added the market is still positioned with a short bias in the pound, so there is scope for a move of 5-10 percent if a breakthrough deal is achieved.

The dollar index, a gauge of its value versus six major peers, traded marginally weaker at 96.5. Much of the weakness is due to the strength in the euro and sterling, which together constitute 70 percent of the index.

The dollar has lost ground for two consecutive trading sessions and is drifting lower from a 16-month high of 97.69 hit earlier this month.

Dollar sceptics are also concerned about the pace of future interest rate increases by the U.S. central bank.

The Fed is expected to impose its fourth rate hike of 2018 in December, but investors wonder how many rate hikes the Fed can impose next year without risking a slowdown in the domestic economy, which has so far held up well even as borrowing costs have risen.

"The Fed is most likely to hike rates in December. I don't see a shift in forward guidance at next month's meeting as that would imply that a significant deteoriation in economic activity is already taking place," added De Garis.

The yen quoted at 112.96, relatively unchanged from its previous close. The Japanese currency has traded in an extremely narrow range over the last four trading sessions, although with a weak bias.

While the Fed is on a monetary tightening path, the Bank of Japan maintains its ultra loose monetary policy due to low growth and inflation. This interest rate differential between U.S. and Japanese bonds, makes the dollar a more attractive bet than the yen.

According to some analysts, another factor supporting the dollar/yen is that Japanese investors are not retreating from U.S. and foreign assets and remain close to fully invested.

The Australian dollar, often considered a gauge for global risk appetite traded relatively unchanged at $0.7251. Analysts expect the Aussie dollar to remain subdued as U.S.-Sino trade tensions are showing no signs of easing ahead of next weekends G-20 meeting, which would keep risk sentiment dampened.