Dollar weak on Powell views; China easing, trade optimism lift Aussie dollar

SINGAPORE (Reuters) – The dollar weakened against its peers on Monday, as investors wagered that the Federal Reserve would put its policy tightening on pause in 2019, which eased market concerns about a slowing for U.S. growth.

Risk appetites were broadly strong in early Asian trade, thanks to China’s aggressive monetary easing on Friday to address a sharp economic slowdown and hopes that Washington and Beijing can strike a comprehensive trade deal.

The yen JPY= relinquished initial gains while the euro EUR= advanced 0.14 percent versus the dollar in early Asian trade. The Australian dollar AUD=, often considered a barometer of global risk appetite, rose 0.1 pct.

“The newsflow we have seen since Friday has lifted sentiment,” said Michael McCarthy, chief markets strategist at CMC Markets in Sydney. “The market certainly liked what (Fed Chair Jerome) Powell said on Friday and the reaction has been negative for the dollar.”

McCarthy also said that China’s cuts in bank reserve requirements “are very important and have lifted commodities… this should be supportive for the Australian dollar.”

On Friday, Powell told the American Economic Association that the Fed is not on a preset path of interest rate hikes and that it will be sensitive to the downside risks the markets are pricing in.

Despite Friday’s stronger than expected U.S. December jobs data, many analysts believe the world’s largest economy is losing momentum and further rate hikes are the last thing it needs. Powell’s comments that the central bank is “prepared to shift the stance of policy” boosted investor sentiment and sent US stocks soaring on Friday.

The dollar outperformed other currencies in 2018 due to the Fed being the only major central bank to hike rates. If the Fed holds rates in 2019, analysts see slim chances of further greenback appreciation.

The dollar index .DXY, a gauge of its value versus six major peers, stood at 96.12 early on Monday , down 0.07 percent.

After a slew of weaker-than-expected manufacturing data, Chinese authorities cut reserve requirements for all banks by 100 basis points. The move frees up $116 billion for new lending as it tries to reduce the risk of a pronounced fall in the pace of economic growth.

The size of the cut was at the upper end of market expectations, and the net funds released would be the largest amount in the five reserve requirement reductions since January 2018.

Financial markets are also optimistic about U.S. officials meeting with their counterparts in Beijing this week for the first face-to-face talks since President Donald Trump and President Xi Jinping in on Dec. 1 agreed to a 90-day truce in their trade war that has roiled international markets.

Both sides have until March 1 to make a deal, after which Trump has pledged to ramp up tariffs to 25 percent, from 10 percent, on $200 billion worth of Chinese imports.

Sterling GBP= was marginally higher versus the dollar at $1.2734.

The Canadian dollar CAD= was marginally stronger versus the greenback at C$1.3375. The loonie has gained for three straight sessions due to a rebound in oil prices.

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