Yen up as nation cancels trade talks
Aussie dollar fluctuates on escalating China-US tensions
The safe-haven Japanese yen blipped briefly higher on Monday as investors reacted to news that China had canceled trade talks with the US, just as the latest round of two-way tariffs kicked in.
The trade-exposed Australian dollar went the other way, taking an early hit after China also summoned the US Ambassador in Beijing and postponed military talks in protest against a US decision to sanction a Chinese military agency.
China then released a white paper on the trade dispute saying it would seek a reasonable outcome, while also describing US tactics as “bullying.”
US President Donald Trump’s second round of 10 percent tariffs covering $200 billion of Chinese exports and counter tariffs from China took effect on Monday.
The early currency moves came in very thin conditions with Japan and China on holiday and were mostly reversed as the session wore on. The dollar soon recovered to 112.58 yen ($1), having been as low as 112.28 at one stage.
The Aussie crawled up to 81.87 yen, after an initial drop to 81.34, but was still down 0.27 percent on the US dollar at $0.7270.
The euro held at $1.1745, with dealers reporting some relief that German Chancellor Angela Merkel’s ruling coalition had resolved a dispute over the country’s scandal-tainted spy master on Sunday, ending a threat to the six-month-old government.
A run of upbeat US economic data has also led markets to price in a much greater chance of a hike in December as well, which should give the currency a fatter interest rate advantage over its major counterparts.
Yet the dollar’s yield buffers are already the widest in decades and it still failed to sustain a rally, being at much the same levels that it was in May.
Marshall Littler, chief strategist at ACL Global, suspected investors were concerned about how the US could continue to fund its trade and budget deficits.
“Trump’s ‘easy-to-win’ trade war doesn’t seem to have done much yet to rectify the US trade imbalance with China or any other country for that matter,” he noted.
“And the tax cuts are blowing up the budget deficit,” Littler said.
“If the US can’t offer more of a yield concession to attract money, it would probably have to offer a price concession via a weaker dollar in order to attract the money necessary to fund these deficits.”
The dollar was still faring better than the pound which on Friday suffered its sharpest one-day drop since June 2017.