Dollar falls in Europe as currency markets go risk-on

The dollar fell 0.6% on Friday, with global risk appetite boosted by the apparent clearing of two clouds that have been hanging over world markets: US-China tariffs due on December 15 and Britain's election.

Currency traders expect the US-China trade war to de-escalate, after US sources said Washington had set out its terms for a trade deal.

UK Prime Minister Boris Johnson's pro-Brexit Conservative party won a majority, which markets expect will fulfil Johnson's promises to end the uncertainty around the UK's departure from the EU.

The Japanese yen, which fell when early indications of the UK election result were announced on Thursday evening, continued to slide on Friday. It was last down 0.3%, heading towards its lowest against the dollar in more than six months.

The dollar index was down 0.6%, its biggest daily fall in six months.

The dollar weakened because risks around Brexit and the trade war had dissipated, said Jeremy Stretch, head of G10 FX strategy at CIBC Capital Markets.

"It's kind of a mirror image of what we were seeing in December last year where risk was being pummeled very aggressively and markets were very uncertain," Stretch said.

"As it stands now, the risk environment is improving materially, and so that provides a more constructive backdrop for the risk-on or higher-beta currencies," he said.

The US trade deal proposal includes an offer to suspend some of the next wave of tariffs on Chinese goods due on Sunday in exchange for China's buying more American farm goods.

Neither Washington nor Beijing have made official statements about reports of the deal, but US President Donald Trump tweeted about it.

After 17 months of market-moving comments from both the US and China sides of the trade war, some scepticism remains and traders will be waiting until the December 15 tariff deadline has passed before believing in the deal.

"Only if it's actually signed and it's really official then the market will fully price it in," said Commerzbank FX strategist Thu Lan Nguyen.

Although the offshore yuan was initially boosted on trade deal hopes, it was down 0.5% versus the dollar in early London trading, partly erasing the previous day's gains.

Nguyen said she expected the yuan to appreciate to below 6.9 - at least temporarily - when a trade deal is signed.

European currencies were boosted by the market-friendly results of Britain's election, which delivered a bigger-than-expected parliamentary majority the Conservatives.

The euro was up 0.4% against the dollar, having hit a four-month high in Asian trading hours before paring some gains.

The pound was last up 1.7% versus the dollar, at $1.3393. It reached a high of $1.3516 in Asian trading. Versus the euro, it was last at 83.45 pence.

CIBC's Stretch said that if the risk-on mood continues then small, open economies that are leveraged to global growth will be potential outperformers, giving the example of the Swedish crown.

But, with a trade deal deadline of December 2020, the uncertainty is far from over.

"There is a risk of some disappointment if businesses continue to hold back on spending until they have more clarity on the future trading relationship," currency analysts at MUFG wrote in a note to clients.