Dollar firm near 2-week high, risk appetite unfazed by weak China GDP

The dollar held steady near a two-week high against a basket of currencies on Monday, as investor risk appetite held up despite the latest data showing China’s 2018 economic growth slowing to a near three-decade low.

The dollar index, which measures its strength against a group of six major currencies, was steady at 96.308 after climbing to 96.394 percent on Friday, its strongest since January 4.

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.

Along with a decline in Treasury yields earlier in the month which had accompanied the retreat in equities, the dollar index had slipped to a three-month low near 95.00 on January 10.

“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 U.S.-China trade friction has already put pressure on China’s economy, with the latest data showing the world’s second-biggest economy slowing further in the last quarter of 2018. Markets appeared to take the outcome, largely in line with expectations, in their stride.

The dollar was down 0.1 percent at 109.64 yen, taking a pause after climbing to a three-week high of 109.895 on Friday. The greenback had gained more than 1 percent against its Japanese peer last week.

The euro nudged up 0.15 percent to $1.1376 but remained in close reach of a two-week low of $1.1353 brushed on Friday.

The pound was 0.1 percent lower at $1.2860.

Sterling had climbed to a two-month peak of $1.3001 on Thursday on growing confidence that Britain can avoid leaving the European Union without a deal, 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 whether any could get majority support.

The Australian dollar was steady at $0.7166 after ending Friday on a loss of 0.3 percent.

The Aussie was largely unfazed by China’s growth numbers though analysts agree that any sharp drop in demand from its biggest trading partner would put a dent in local assets.

Australia’s close trading links with the world’s second-biggest economy means its currency is often regarded as a proxy to China-related trades.

The 10-year Treasury note yield rose to a three-week high of 2.799 percent on Friday, continuing its rise from a one-year low of 2.543 percent plumbed early in January.

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

Source: Reuters