Dollar dips as US-China trade talks removes some fear from markets

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TOKYO (Aug 17): The dollar stepped back from 13½-month highs against other major currencies on Friday as talks next week between China and the United States offered some hope that the world's two largest economies will find a way to head off a full-blown trade war.

The dollar index, a measure of the greenback's strength against a basket of six major peers, was 0.1% lower at 96.549.

It had climbed to 96.984, its highest since late June 2017 on Wednesday during a week in which a plunge by the Turkish lira and concerns over China's economic health hit emerging market currencies, driving up demand for the safe-haven greenback.

The dollar lost steam, however, after China and the United States agreed on Thursday to hold a new round of trade talks on Aug 21-22, helping stem risk aversion in the broader markets.

The euro, which had also been hit by fears of a spillover from Turkey's financial crisis, was among the currencies to benefit from the news of trade talks.

The euro was a shade firmer at US$1.1380, after gaining 0.3% overnight. The single currency was down 0.25% this week, having brushed a 13-month low of US$1.1301 in the wake of concerns that the Turkish crisis could hurt European banks.

"Considering that European banks' exposure to Turkey is relatively limited, this week's reaction by the euro looked overdone. But the rise in Italian bond yields amid the country's fiscal concerns may continue indefinitely and limit the bounce by the euro," said Masafumi Yamamoto, chief forex strategist at Mizuho Securities.

The Turkish lira was little changed at 5.87 per dollar, and the closure of Turkish financial markets for a string of national holidays during Aug 21-24 also provided some respite.

The lira plunged to a record low of 7.24 on Monday before mounting a three-day rebound, helped by factors including measures by the Turkish central bank to support its currency and Qatar's pledge to invest US$15 billion in Turkey.

However, there are still concerns over Turkish President Tayyip Erdogan's policies to combat the country's double-digit inflation and his row with Washington over detained American pastor Andrew Brunson.

Investors' immediate focus was on how the lira could react to a Standard & Poor's sovereign credit rating report on Turkey due later on Friday. Back In May, S&P cut Turkey's rating further into junk territory.

Meanwhile a rebound by onshore Chinese yuan faded, with the currency last standing a touch firmer at 6.8864 per dollar after briefly strengthening to 6.8630.

News of the US-China trade talks had helped the yuan pull back from a 19-month trough of 6.9340 set mid-week.

"With the much stronger than expected daily fixing in the past few days and improving sentiment on the US-China trade talk, the market will be more cautious in chasing USD/CNY higher in the near term," strategists at OCBC Bank wrote.

The dollar was steady at 110.865 yen, on track to end the week virtually flat.

The Australian dollar was up 0.1% at US$0.7268, as its rise from the previous day lost momentum after Reserve Bank of Australia (RBA) Governor Philip Lowe said interest rates would stay at record lows "for a while yet".

The Aussie had gained 0.3% on Thursday following news of the new round of US-China trade discussions.