SYDNEY – The safe-haven Japanese yen briefly blipped higher on Monday as investors reacted to news that China had canceled trade talks with the United States just as the latest round of tariffs are set to take effect.
The trade-exposed Australian dollar went the other way, taking an early hit after China also summoned the U.S. ambassador in Beijing and postponed military talks in protest of a U.S. decision to sanction a Chinese military agency.
President Donald Trump’s second round of 10 percent tariffs covering $200 billion of Chinese exports come into effect later on Monday.
The early currency moves came in very thin conditions with Tokyo on holiday and were mostly reversed as the morning wore on. The dollar was just a shade easier at ¥112.54, having been as low as ¥112.28 at one stage.
The Aussie crawled back up to ¥81.84, after an initial drop to ¥81.34, but was still down 0.23 percent on the U.S. dollar at $0.7272.
The euro held at $1.1745, with dealers reporting some relief that Chancellor Angela Merkel’s ruling coalition resolved a dispute over Germany’s scandal-tainted spymaster on Sunday, ending a threat to the six-month-old government.
The dollar was steady against a basket of currencies at 94.214 as investors look ahead to an almost certain rate hike from the Federal Reserve on Wednesday.
A run of upbeat U.S. economic data has also led markets to price in a much greater chance of a move in December as well, which should give the currency a fatter rate advantage over its competitors.
Yet the dollar’s yield buffers are already the widest in decades and it still failed to sustain a rally, being at much the same levels it was back in May.
Marshall Gittler, chief strategist at ACLS Global, suspected investors were concerned about how the U.S. could continue to fund its trade and budget deficits.
“Trump’s ‘easy-to-win’ trade war doesn’t seem to have done much yet to rectify the U.S. trade imbalance with China, or any other country for that matter,” he noted. “And the tax cuts are blowing up the budget deficit.
“If the U.S. can’t offer more of a yield concession to attract money, it would probably have to offer a price concession via a weaker dollar in order to attract the money necessary to fund these deficits.”
The dollar was still faring better than the pound, which on Friday suffered its sharpest one-day drop since June last year amid doubts about a Brexit deal.
British Prime Minister Theresa May on Friday acknowledged that talks with the European Union had reached an impasse after the bloc’s leaders had rejected her plans.
Opposition leader Jeremy Corbyn said on Sunday he would back a second Brexit referendum if his Labour Party votes to pursue the move, heaping further pressure on May.
Sterling was last at $1.3077, far below last week’s top of $1.3297.