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Dollar Holds Gains as Trade Fears Spur Risk Aversion

5/29/2019, 3:05:33 PMBasics of Trading
Dollar Holds Gains as Trade Fears Spur Risk Aversion

The U.S. dollar was steady against a currency basket on Wednesday, holding onto gains from the previous session as concerns over heightened trade tensions between the U.S. and China prompted investors to seek refuge in safe haven assets.

Weakness in the euro also helped underpin the greenback, as uncertainty surrounding the outlook for the euro area’s economy and political future pressured the single currency.

The U.S. dollar index, which measures the currency against a basket of six peers, was almost unchanged at 97.820 by 02:56 AM ET (06:56 GMT) having ended up 0.3% overnight. The index was trading about 0.5% off a two-year high of 98.371 hit on Thursday and is still up 1.8% for the year.

Investors focus remained on the ongoing Sino-U.S. trade war. China is prepared to use rare earths to strike back in a trade war with the U.S. Chinese media reported overnight, a move that would escalate tensions between the world's two largest economies.

U.S. President Donald Trump said on Monday that Washington was not ready to make a deal with China yet.

The surge in risk aversion has spurred demand for U.S. Treasuries, sending yields on 10-year Treasuries down to their lowest levels since September 2017. Bond yields fall as prices increase.

The euro was holding steady at 1.1162 after ending the previous session down almost 0.3%, not far off the two-year low of 1.1105 reached on Thursday.

European Union leaders are set to begin the process of filling a number of top EU posts, from the head of the European Commission to the European Central Bank.

"The reason we've seen the euro drop off is because the European zone in particular has been threatened by and troubled by the trade concerns," said Rakuten's Twidale.

"On the back of that, we also had those European elections so there's a lot of political instability in Europe," he added. "That's putting pressure on the currency."

Italian Deputy Prime Minister Matteo Salvini, whose far-right League triumphed in European elections on Sunday, said the European Commission could fine Italy 3 billion euros for breaking EU debt and deficit rules, a comment that weighed on the single currency.

The dollar was slightly lower against the yen and the Swiss franc at 109.23 and 1.0063, respectively.

The yen and the Swissy are traditional safe haven currencies, which tend to attract demand during times of geopolitical or financial stress.