Dollar drifts in year-end trade as clouds gather

Tuesday, 1 January 2019 00:00 - - {{hitsCtrl.values.hits}}

LONDON (Reuters): The dollar was broadly steady in thin year-end trading on Monday with the Australian dollar leading gainers as tensions over a trade dispute between the United States and China faded on expectations of progress in trade talks.

The Australian dollar gained 0.4% to $0.7063 but on the year is down 10%.

The Aussie has suffered against the greenback this year due to tensions between the world’s two biggest economies because of its status as a currency highly correlated to global trade.

In a tweet which provided relief to financial markets, US President Donald Trump said on Sunday that he had a “long and very good call” with his Chinese counterpart Xi Jinping and that a possible trade deal between the United States and China was progressing well.

The dollar was broadly steady at 96.43 but is set to close the year up nearly 5% against its rivals on trade tensions and rising interest rates. China and the United States have been in a trade war for much of 2018, shaking world financial markets as the flow of hundreds of billions of dollars worth of goods between the world’s two largest economies has been disrupted by tariffs.

Going into 2019, the outlook for the dollar is more subdued with growing expectations that a three-year rate hiking cycle in the United States has come to a close. Markets currently expect no rate hikes next year.

“Along with growing expectations of no more rate hikes, the familiar issues of the twin deficits is expected to weigh on the dollar next year,” said Alvin Tan, a currency strategist at Societe Generale in London. The dollar has been relatively stable going into the end of 2018 despite falling US Treasury yields. The US 10-year Treasury bond yield was at 2.71% on Monday, having fallen nearly 30 basis points in December.

The euro was last quoted at $1.1440, flat versus the dollar.

Although the single currency has gained versus the dollar in recent weeks, economic growth and inflation in Europe remain much weaker than the European Central Bank’s expectations. The euro is set to lose nearly 5% versus the dollar in 2018.

Elsewhere, sterling, which has been battered this year by Brexit woes, rose to a three-week high in quiet trade. It rose 0.3% at $1.2732 but has lost more than 6% of its value versus the dollar this year.