LDN - Business

Dollar mired at two-week lows as Syria fears grow

[April 11, 2018] By Tom Finn

LONDON (Reuters) - The U.S. dollar slipped to a two-week low against a basket of currencies on Wednesday as trade war fears receded but uncertainty over possible Western military action against Syria bred risk aversion among some investors.

Equity markets fell with U.S. stock index futures <ESc1> down nearly one percent and the safe-haven Japanese yen climbed to the day's highs against the dollar.

Concerns about military action in Syria appear to be overshadowing any relief about a reduction in trade tensions between China and the United States.

"The immediate trigger for today's risk aversion is neither rising U.S. yields or trade wars but the possibility of a reaction to the suspected chemical attack on civilians in Syria," Societe Generale FX strategist Kit Juckes said.

The dollar index versus a basket of six major peers was down 0.1 percent at 89.516 <.DXY>, trading within sight of a low of 89.251 set on March 28.

Against the yen, the dollar fell about 0.3 percent to trade at 106.750 yen. <JPY=EBS>

Russia and the United States tangled on Tuesday at the United Nations over the use of chemical weapons in Syria as Washington and its allies considered whether to strike at Syrian President Bashar al-Assad's forces over a suspected poison gas attack last weekend.

Pan-European air traffic control agency Eurocontrol on Tuesday warned airlines to exercise caution in the eastern Mediterranean due to the possible launch of air strikes into Syria in next 72 hours.

Investors had cautiously returned to markets after China promised on Tuesday to open the country's economy and lower import tariffs on products such as cars.

That assurance helped allay concern about a trade war with the United States and restored some appetite for risk among investors in commodity currencies and emerging markets.

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The Swiss franc was the worst performing G10 currency on Wednesday and fell 0.3 percent against the euro to 1.1823, its lowest since 2015.

The franc is seen by some as a safe-haven currency in times of political uncertainty so its fall can imply risk appetite remaining firm.

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U.S. Dollar banknotes are seen in this photo illustration taken February 12, 2018. REUTERS/Jose Luis Gonzalez/Illustration

Some investors are concerned that foreign exchange, the world's largest market, could be dragged into a trade conflict.

China's central bank governor on Wednesday, when asked whether China would devalue its currency to counter U.S. tariffs, said the country's exchange rate mechanism had been working well and that it had not intervened in currency markets for a long time.

Opinions differ on whether a full-blown trade dispute has been averted.

"The risk of a trade war poses the most serious risk to continued strong global momentum. However, the likelihood that the current tit-for-tat threats escalate to such an extent seems low," Berenberg senior economist Kallum Pickering said.

Elsewhere, investors eyed U.S. inflation data due later in the session and minutes from the Federal Reserve's March meeting for signs of whether the Fed will favor three or four rate hikes this year.

Analysts polled by Reuters forecast that the core consumer price index (CPI) would be unchanged year-on-year in March, after a 0.2 percent rise in February.

"Inflation is expected to nudge a little higher in March but not to the point that markets will feel the Fed definitely needs to up the pace of tightening," Scotiabank's chief FX strategist Shaun Osborne said in a note.

The euro gained 0.2 percent at $1.2383 <EUR=>, its strongest level since March 28. The common currency received a boost on Tuesday after European Central Bank policymaker Ewald Nowotny said the ECB's bond buying program would be wound down by the end of this year, paving the way for the bank's first rate rise since 2011.

The rouble took another leg down on Wednesday, falling more than 1 percent against the dollar <RUB=>, taking its losses so far this week to nearly 12 percent as markets reeled from the latest U.S. sanctions. Turkey's lira <TRY=> sank to a new record low against the dollar as investors worried about the outlook on monetary policy.

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