Dollar heads towards one-year highs as trade concerns dominate

The dollar rose on Monday, edging towards a one-year high, as escalating trade war rhetoric between the United States and its trading partners helped the US currency.

Chinese stocks slumped nearly 2 per cent as Beijing had proposed tariffs on $60 billion worth of US goods on Friday, while a senior Chinese diplomat cast doubt on the prospects of talks with Washington to resolve the conflict.

“The trade war concerns are supporting the dollar and there is a bit of a risk-off tone in the markets,” said Manuel Oliveri, a currency strategist at Credit Agricole in London.

The dollar index, which measures it against a basket of six other major currencies, was about 0.2 per cent higher at 95.27, heading back towards a more-than-one-year peak of 95.652 reached on July 19.

The dollar gained against emerging-market currencies. The Turkish lira weakened 0.6 per cent, reaching a record low of 5.12 to the dollar after the United States had announced late Friday it was reviewing Turkey's duty-free access to US markets a move that could affect nearly $1.7 billion of Turkish imports.

Currency markets remained cautious, with high-yielding currencies such as the Australian dollar weaker against the yen and the Swiss franc.

With Friday's US jobs data broadly indicative of a strong economy and July inflation data due later this week, markets are primed for a further increase in US Treasury yields, which should support the dollar.

Yields on two-year US debt have climbed nearly 40 basis points since April while the dollar has risen nearly 7 per cent since then.

Efforts by the Chinese central bank to curb currency weakness have proved ineffective. Both the onshore and offshore yuan were slightly weaker against the dollar.

China's central bank said it would set a reserve requirement ratio of 20 per cent from Monday on financial institutions settling foreign exchange forward dollar sales to clients, effectively raising the cost for investors of betting against the yuan. Elsewhere, the euro held at a five-week low of $1.1550.

Bart Wakabayashi, Tokyo branch manager at State Street Bank said the negative impact on markets from the trade tariff exchanges between Washington and Beijing is not as acute it had been previously.

“Whenever there is an imbalance in the market in terms of uncertainty, the initial flight to safety is probably to the dollar, which is the preferred currency right now,” he said.

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