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The dollar rose to a two-week high against a basket of major currencies on Thursday after a late recovery by U.S. equities helped the currency recover as investors reassessed the danger a trade war between the China and the United States.
Investors have kept an eye out for any wider fallout from a Sino-US trade dispute, after Beijing on Wednesday proposed tariffs on US imports, including soyabeans, planes, cars, beef and chemicals.
The yen, often sought in times of market turmoil and political tensions, had rallied as US shares tumbled on Wednesday after China imposed retaliatory tariffs on US goods.
But a comeback by US equities helped the dollar recoup some losses after President Donald Trump's economic adviser said the administration was negotiating with China, not engaging in a trade war.
“A trade war may now be the number one risk for investors after China's retaliation to U.S. tariffs, but will have to heat up to spill over into the currency arena,” said Viraj Patel, a currency strategist at ING in London.
“FX markets have taken on the role of a casual observer ... changes in global FX volatility have been pretty much in line with historical averages.”
Traders are divided other whether the row will affect the dollar meaningfully and, if it does, whether it will help or harm the currency.
The dollar has weakened in three of the last five sessions against the yen, down more than 5 per cent so far this year. Against the Swiss franc, it has fallen 1.4 per cent so far in 2018. The yen and franc tend to appreciate during geopolitical and economic tension.
The dollar rose 0.2 per cent against a basket of six major currencies to 90.32 as risk appetite improved and Wall Street's main indexes advanced, helping the US currency stabilise after recent declines. The euro fell 0.2 versus the dollar to $1.2232.
The dollar was 0.3 per cent higher at 107.07 yen, having pulled higher from a low of 105.99 set the previous day.
“It's too early to say whether the markets have moved beyond trade conflict woes. The situation is still very fluid, and currencies, like dollar/yen, will remain hostage to each turn in equities,” said Junichi Ishikawa, senior FX strategist at IG Securities in Tokyo.
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