The dollar rose to two-week highs on Monday after the United States and China agreed to resume trade talks, with investors selling safe-haven currencies such as the Japanese yen and Swiss franc as tensions eased between the world's two largest economies. While reports of an agreement had been flagged ahead of US President Donald Trump and Chinese counterparty Xi Jinping's meeting on the sidelines of the G20 meeting in Osaka, Japan, the outcome was more positive than investors had expected.
Trump said he would hold back on new tariffs and China will buy more farm products, and he offered to ease restrictions on tech company Huawei. Market participants, however, remained cautious as the negotiations did not signify that a deal is imminent. "Uncertainty will linger," said Kevin Cummins, senior US economist at NatWest Markets. "As we have learned - from the swift breakdown in talks with China in May after a deal seemed imminent, as well as the threat of tariffs against Mexico in June even after a trade deal with Mexico and Canada had been reached - a delay in action now does not necessarily beget a full trade deal in the near future."
Still, China's offshore yuan also rose more than 0.5% to as high as 6.8165 yuan per dollar, near a two-month high, before easing back to 6.8476 after disappointing factory activity data. The dollar also extended gains after data showed the US manufacturing activity index, as measured by the Institute for Supply Management, came in slightly higher than expected in June, at 51.7. The details of the report, however, were not so stellar, with the prices paid index, an inflation indicator, hitting its lowest since February 2016, and the forward-looking new orders index falling to its weakest since December 2015.
"Although the headline ISM manufacturing index didn't fall as far as feared in June, the decline in the ... new orders component suggests the worst is still to come," said Michael Pearce, senior US economist at Capital Economics. The dollar, which has fallen in recent weeks on rising expectations for Federal Reserve interest rate cuts, rose 0.8% against a basket of currencies, to 96.848, with the index hitting 96.867, a roughly two-week peak.
The euro, meanwhile, fell 0.8% to $1.1283. The yen, which investors tend to buy when they are looking for safety, fell, pushing the dollar up 0.5% at 108.47 yen. Earlier, the dollar hit a two-week high of 108.53 yen. The dollar also rose against the Swiss franc, up 1.2 pct to 0.9839 franc, after hitting a two-week peak of 0.9884.