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FOREX-Muted reaction in currencies to US-China trade deal; dollar index falls

Reuters | Updated: 16-01-2020 14:58 IST | Created: 16-01-2020 14:49 IST
FOREX-Muted reaction in currencies to US-China trade deal; dollar index falls
Representative Image Image Credit: Pixabay

Major currencies mostly shrugged off on Thursday the signing of the Phase-1 trade deal between the United States and China, as most of the issues agreed upon had been expected by investors since the summer.

Euro/dollar, the most fluid currency pair, was the last trading up 0.1% at $1.1164, matching the one-week high it reached the day before. An index that tracks the dollar against six other major currencies fell to an eight-day low of 97.14.

Beijing and Washington touted the Phase 1 deal, signed late on Wednesday at the White House, as a step forward in resolving their bitter trade dispute. U.S. Vice President Mike Pence fed optimism about further progress, saying further Phase 2 discussions had already begun.

Yet market exuberance was checked because much of this was priced in already and because it addresses a few of the issues that led to the trade conflict in the first place. "Yesterday's signing of the phase one trade deal provided confirmation of the progress made in trade talks since last summer. The details of the deal were broadly in line with expectations that have dampened the market impact overnight," said Lee Hardman, currency strategist at MUFG.

But other than the fact that it met expectations, analysts said the agreement does not fully eliminate tariffs and is vague on enforcement, and makes no real progress on a host of thorny problems. Some were also skeptical that purchase targets set out in the deal are realistic. "The deal relies heavily on China's goodwill and includes forced purchases of U.S. goods and protection for Intellectual Property rights and forced technology transfers," said Sebastien Galy, strategist at Nordea Asset Management.

The centerpiece of the trade deal is a pledge by China to purchase at least an additional $200 billion worth of U.S. farm products and other goods and services over two years. The United States will also cut by half the tariff rate it imposed on Sept. 1 on a $120 billion list of Chinese goods, to 7.5%. "Some demands are extremely hard to swallow, such as changing laws to accommodate the U.S. Overall, it feels like something that will not last more than a few months," Galy said.

The Chinese yuan, the currency most sensitive to the two-year U.S.-China trade dispute, was also 0.1% higher at 6.8852 per dollar in the offshore market, not far from the six-month high of 6.8662 it jumped to on Tuesday. The level 7 in dollar/yuan has been a barometer for U.S.-China tensions, so the fact that the Chinese renminbi has remained below this level shows that investors remain more or less optimistic about the trade relationship between the world's two biggest economies and its impact on global growth.

The safe-haven Japanese yen was 0.1% softer at 110.03 per dollar, while the Australian dollar held 0.1% firmer at $0.6916. Both of these currencies were also a gauge of stress. The British pound rose to a six-day high of $1.3065. Against the euro, it was trading at 85.45 pence, 0.1% higher.

(This story has not been edited by Devdiscourse staff and is auto-generated from a syndicated feed.)


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