Dollar defensive as Sino-US trade tension weighs

By Ankur Banerjee

SINGAPORE (Reuters) -The U.S. dollar drifted lower on Thursday as the Sino-U.S. trade war dented investor sentiment, while growing confidence the U.S. Federal Reserve will cut its policy interest rate this year also weighed on the greenback.

The euro hit a one-week high and was up 0.12% at $1.1661 as traders braced for yet another episode in the French political drama, with Prime Minister Sebastien Lecornu likely to survive two no-confidence votes in parliament.

The yen briefly firmed to a one-week high of 150.51 per dollar but was last flat at 151.04. Japan’s weakened Liberal Democratic Party is set to begin policy talks with right-leaning the Japan Innovation Party on Thursday that could help Sanae Takaichi clinch a prime ministerial vote expected next week.

Investor focus this week has been on the trade spat between the world’s biggest economies, with U.S. officials blasting China’s expansion of rare earth export controls as a threat to global supply chains.

China’s Commerce Ministry defended the controls, pointing to U.S. measures on Chinese goods and companies and calling U.S. criticism hypocritical.

That has undermined the dollar through the week. The dollar index, which measures the greenback against six other currencies, was down 0.16% at 98.512, headed for a weekly decline of 0.33%.

TRUMP-XI MEETING

Amid the tit-for-tat action, U.S. President Donald Trump still expects to meet Chinese President Xi Jinping in South Korea this month, U.S. Treasury Secretary Scott Bessent said.

Vasu Menon, managing director of investment strategy at OCBC, noted the latest trade measures are scheduled to take effect in November after Trump and Xi meet.

“If the meeting goes ahead, some of last week’s measures could be toned down or even unwound and presented as successful deliverables.”

The sides have maintained lower tariffs and continued rare earth flows under a six-month trade truce that has been repeatedly extended for 90-day periods. Bessent has suggested a longer extension was possible.

“An extension, rather than a grand bargain that settles all trade issues, is probably the most realistic second-best outcome compared to the alternative of escalation of retaliation,” said Joseph Capurso, head of foreign exchange at Commonwealth Bank of Australia.

The Australian dollar slipped 0.36% to $0.64875 after data showed unemployment hit a near four-year high in September, adding to the case for interest rate cuts. [AUD/]

The Aussie, often considered a proxy for risk appetite, has been volatile this week due to the trade tension as traditional havens including the Swiss franc gained. The franc was last firmer at 0.7955 per U.S. dollar.

China’s yuan firmed to a two-week high against the U.S. dollar on Thursday after the central bank set its strongest daily midpoint in a year. [CNY/]

FED CUT WAGERS

With the U.S. government shutdown entering its third week, investors have focused on policymakers’ comments for a sense of the Fed’s near-term path due to the lack of economic data.

“With the Fed in the dark, the longer the absence, the bigger the chance of an unwelcome data dump,” said Thomas Poullaouec, portfolio manager at T. Rowe Price.

But Fed Chair Jerome Powell calmed investor nerves earlier this week by leaving the option of another rate cut on the table by saying U.S. labour market remained mired in low-hiring, low-firing doldrums.

Traders have priced in 48 basis points of easing this year, indicating increasing confidence for cuts at the Fed’s two remaining policy meetings this year.

POLITICAL DRAMA EVERYWHERE

Rising political uncertainty across the globe has kept investors on edge as they wait to see the extent of the fallout, particularly in France and Japan.

France is in the midst of its worst political crisis in decades as a succession of minority governments seek to push deficit-reducing budgets through a truculent legislature split into three distinct ideological blocs.

Lecornu, already France’s shortest-serving prime minister in modern times before he was re-appointed last week, had faced the prospect of an even shorter second stint until he made pension reform concessions to win support from the left.

In Japan, the ruling Liberal Democratic Party chose Takaichi as its chief this month but her path to becoming Japan’s first female prime minister has become trickier after the Komeito party chose to end their coalition last week.

With the parliament failing to set a date for its vote on a new prime minister so far, investors are keeping an eye on how coalitions shape up.

The uncertainty could be an overhang for the yen though external factors have aided flows to such havens, analysts said.

“The cost of becoming prime minister is likely to be looser budget settings,” CBA’s Capurso said. “There is unlikely to be much, if any, political support for policy tightening by the Bank of Japan.”

(Reporting by Ankur Banerjee in Singapore; Editing by Christopher Cushing and Lincoln Feast.)