Sterling rises against US dollar but Brexit concerns remain

The dollar extended its losses in thin year-end trading on Monday as expectations faded for U.S. interest rate increases, with sterling leading the gains. The pound rose more than half a per cent, supported by broad-based gains in stocks and hopes for a resolution of the trade dispute between the United States and China. The Australian dollar, a currency highly correlated to global trade, also held near Asian session highs. U.S. President Donald Trump tweeted on Sunday that he had a "long and very good call" with his Chinese counterpart Xi Jinping and that a possible trade deal between the United States and China was progressing.

Risk appetite was strong going into the New York session. U.S. stock futures are up nearly one per cent. On Monday, the dollar was down a quarter of a per cent at 96.43, but it is set to close the year up more than 4.5 per cent against its rivals. The Australian dollar gained 0.4 per cent to $0.7063 but on the year is down 10 per cent. China and the United States have been in a trade war for much of 2018, shaking world financial markets.

The flow of hundreds of billions of dollars worth of goods between the world's two largest economies has been disrupted by tariffs. Going into 2019, the outlook for the dollar is more subdued. Expectations are growing that a three-year cycle of rate increases in the United States is coming to a close. Market expectations for no more rate hikes next year stand at nearly 80 per cent compared to only a quarter a month ago, according to the CME Fedwatch tool.

"Along with growing expectations of no more rate hikes, the familiar issues of the twin deficits is expected to weigh on the dollar next year," said Alvin Tan, a currency strategist at Societe Generale in London. While the dollar has been relatively stable going into the end of 2018 despite falling U.S. Treasury yields, concerns are growing over the dollar's outlook.

The U.S. 10-year Treasury bond yield was at 2.71 per cent on Monday, down nearly 30 basis points in December. Sterling has been battered this year by Brexit woes, but it rose to a three-week high in quiet trade. It rose more than half a per cent against the dollar at $1.2765 but has lost more than 6 per cent of its value versus the dollar this year.