Dollar set for weekly gains on trade optimism; euro near one-month low

Investing.com - The U.S. dollar slipped slightly lower Friday, but was on course for weekly gains as trade tensions lessened and the Federal Reserve indicated it was in no hurry to cut rates.

At 04:30 ET (08:30 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, fell 0.2% to 100.275, but remains on course for weekly gains of around 0.4%.

Dollar set for weekly gains

The U.S. central bank kept its benchmark interest rate steady in the 4.25%-4.50% range on Wednesday, as widely expected, but Chair Jerome Powell emphasized the current elevated level of uncertainty.

He said it was unclear if the economy will continue its steady pace of growth, or wilt under mounting uncertainty and a possible spike in inflation.

These remarks have seen market participants reduce the likelihood the Fed lowers rates any time soon, with the pricing for a cut in June drifting to about 17% from about 55% a week ago.

The dollar has also benefited from the news of a trade agreement between the U.K. and the U.S., especially ahead of the start of negotiations between Chinese and American diplomats over the weekend.

“Markets have welcomed the first U.S. trade deal since Liberation Day, although the British-American agreement is hardly a game-changer for either of the two countries,” analysts at ING said, in a note.

“The dollar is benefiting from Trump shifting to market-appeasing mode, but likely requires more positive trade developments, especially on China, to continue recovering.”

Euro bounces from one-month low

In Europe, EUR/USD traded 0.2% higher to 1.1251, with the single currency bouncing from the one-month low seen in Asia overnight.

That said, the euro could suffer as positive sentiment towards the U.S. dollar grows as trade tensions diminish.

“We’ll see whether EUR/USD starts to form a new support floor at 1.1200; a break lower would signal a marked shift in sentiment on the pair and potentially pave the way for larger corrections, with 1.100 being the next big support,” said ING.

The euro zone’s fight to bring inflation back to the 2% target is on track but the growth environment is deteriorating, with a global trade war creating a significant risk in the outlook, Finnish central bank chief Olli Rehn said on Friday.

GBP/USD edged 0.1% higher to 1.3259, with sterling bouncing from the three-week low seen in the wake of the trade announcement as early optimism dissipated.

“The deal had already been largely priced in, and the implications for the U.K. economy are not significant,” said ING.

The "general terms" agreement modestly expands agricultural access for both countries and lowers prohibitive U.S. duties on British car exports, but leaves in place the 10% baseline.

The Bank of England also lowered rates by 25 bps to 4.25% on Thursday, as widely expected.

Yen posts small gains

In Asia, USD/JPY traded 0.4% lower to 145.24, but the pair remained near a one-month high following softer-than-expected overall wage income data, which went against the Bank of Japan’s narrative of higher wages and sticky inflation.

USD/CNY traded 0.2% higher to 7.2464, with the Chinese currency receiving little support from data showing a bigger-than-expected increase in Chinese exports, despite headwinds from steep U.S. trade tariffs against Beijing.

China’s imports also shrank much less than expected, while its trade balance just missed expectations in April.

The trade data came just ahead of trade talks between Chinese and U.S. officials, which are set to take place in Geneva over the weekend.

This article first appeared in Investing.com