The safe-haven yen and Swiss franc slid against the dollar on Tuesday as growing signs the United States and China are inching closer to a trade deal boosted risk appetite and spurred investors to seek higher-yielding currencies.
Gains against the yen and Swiss franc pushed the dollar index to a three-week high, tracking the rise in benchmark US 10-year Treasury yields. Trade-oriented currencies such as the Australian dollar surged as well, with the Chinese currency climbing to a three-month high against the greenback.
A decision by the Chinese central bank to trim lending rates by only 5 basis points also increased overall risk-taking.
China is pushing US President Donald Trump to remove more tariffs imposed in September as part of a "phase one" US-China trade deal, which is expected to be signed later this month, people familiar with the negotiations said.
"Growing trade deal optimism continues to be the driver behind rising US 10-year yields this week and we think this morning's move above 1.83% is getting the fund longs excited about a breakout move higher into the 109s (in dollar/yen)," said Erik Bregar, head of FX strategy at Exchange Bank of Canada in Toronto.
In afternoon trading, the US dollar rose 0.6% against the yen to 109.21 yen, and was up 0.6% versus the Swiss franc at 0.9935.
The yen and Swiss franc tend to strengthen in times of geopolitical tension and financial stress.
The dollar index gained 0.5% to 97.969.
The yuan traded in the offshore market jumped to its strongest level since Aug. 5 at 6.9838. The onshore yuan also posted its strongest close since Aug. 2..
The currency held its gains even after China's central bank cut its one-year medium-term lending facility (MLF) rate for the first time since early 2016, though it opted for a 5 bps cut, which Commerzbank called "tiny."
China and the United States have imposed tariffs on each other's goods in a trade war that has dragged on for 16 months and raised the specter of a global recession.
Kit Juckes, head of FX strategy at Société Générale, said the agreement would probably mark a truce rather than peace but added that "the chance of getting a first-stage deal seems to be quite good."
The optimism spilled over into other currencies, with the Australian dollar close to recent three-month peaks and the highest versus the yen since the end of July.
The euro, however, was down 0.4% against the dollar at $1.1091.
Societe Generale's Juckes said the euro would be one of the last currencies to benefit from improved risk sentiment, noting that Monday's data showing Polish manufacturing activity in its sharpest downturn in 10 years had taken the wind out of the euro.
Central European states such as Poland are a key market and investment destination for euro zone companies.
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