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Yen Firms as China Growth Slows, Dollar Dips

1/21/2019, 7:57:28 PMMarket Analysis
Yen Firms as China Growth Slows, Dollar Dips

The safe haven Japanese yen firmed against the dollar on Monday as investors digested the latest signs of a slowdown in China after data pointing to a dip in fourth quarter growth.

Official data showed that China’s economy grew by an annualized 6.4% in the three months to December, down from 6.5% in the third quarter. It was the slowest rate of growth since the global financial crisis and marked the third consecutive quarter of slowing growth.

Growing signs of weakness in China -- which has generated nearly a third of global growth in recent years -- are fueling anxiety about risks to the global economy.

The dollar was lower against the yen, which is often sought by investors as a safe haven in times of market uncertainty, with USD/JPY down 0.18% to 109.56 by 03:18 AM ET (08:18 AM GMT).

The greenback had risen more than 1% against the yen last week, hitting a two-and-a-half week high of 109.88 on Friday.

The U.S. dollar index, which measures the greenback’s strength against a basket of six major currencies, edged down 0.1% to 95.90, not far from Friday’s two-week high of 96.05.

Hopes for a thaw in U.S.-China trade tensions, a more dovish-sounding Federal Reserve and optimism that Britain could avoid a "No-Deal" Brexit are some of the factors that have fanned the return in investor risk appetite, which went into a deep freeze in December as global equity markets tumbled.

"The dollar index is clearly on a recovery track. The currency was stuck in a downtrend at the start of January but is now being bought back against its peers such as the yen, euro, pound and the Aussie," said Junichi Ishikawa, senior FX strategist at IG Securities in Tokyo.

"Whether the current 'risk on' supporting the dollar can continue will likely depend on how U.S. corporate earnings turn out. The United States and China falling out again over trade issues and volatile U.S. politics still remain the main potential risk factors."

The euro pushed higher, with EUR/USD rising 0.22% to 1.1384, pulling away from Friday’s lows of 1.1352.

The pound was holding steady, with GBP/USD changing hands at 1.2867.

Sterling had climbed to a two-month peak of 1.3001 on Thursday on growing confidence that Britain can avoid a no-deal Brexit, but faced profit-taking on Friday.

"The pound is at current levels based on assumption that a no deal Brexit has been avoided. But even an exit with a deal will likely leave some damage on the economy, so it is difficult to see the pound make much further headway from here," said Koji Fukaya, president at FPG Securities in Tokyo.

British Prime Minister Theresa May will on Monday put forward a motion on her proposed next steps. Over the following week, lawmakers will be able to propose alternatives. They will debate these plans on Jan. 29, and voting on them should indicate what plan, if any, could get majority support in parliament.

The Australian dollar, sometimes viewed as a proxy for sentiment on China-related trade, was almost unchanged, with AUD/USD at 0.7166.

The U.S. financial markets will be closed on Monday for Martin Luther King Jr. Day.