Dollar surges after China-US truce improves growth outlook

WASHINGTON: The dollar surged on Monday as the United States and China struck a truce to reduce reciprocal tariffs temporarily, easing fears of carnage from a trade war between the world’s two biggest economies.

The US will reduce extra tariffs it imposed on Chinese imports in April to 30 per cent from 145 per cent and Chinese duties on US imports will fall to 10 per cent from 125 per cent. The de-escalation surpassed investor expectations and followed negotiations over the weekend.

The greenback’s climb clobbered safe-haven currencies the most, rising 1.9 per cent to 148.16 yen and 1.5 per cent to 0.8443 Swiss francs.

“(US President Donald) Trump has toned down his tariffs faster than anyone thought he could. It seems that tariffs on China will fall to manageable levels, albeit temporarily,” said Arne Petimezas, director of research at AFS Group in Amsterdam.

The dollar 1.1 per cent against a basket of currencies to hit a more than one-month high. It was still down 2.3 per cent from Trump’s April 2 announcement of sweeping tariffs as his often chaotic rollout of policies shook confidence in US assets.

“Now the conditions are falling into place for a deeper adjustment and a bigger recovery of the dollar to catch up with US equities and bond yields,” said Kenneth Broux, senior strategist at Societe Generale in London.

US and China reach deal to slash trade tariffs

The euro tumbled 1.3 per cent against the dollar to $1.111 on track for its steepest one-day loss this year. Sterling shed 1 per cent to $1.318.

“We can see a bit more euro-dollar weakness as we’re breaking some key technical levels,” Broux said.

The focus this week will also be on US Consumer Price Index (CPI) figures on Tuesday and on April retail sales due on Thursday for indications of how the trade spat has impacted the economy and expectations for further interest rate cuts by the US Federal Reserve.

Traders on Monday bet on fewer rate cuts by the Fed and European Central Bank as economic prospects improved after the Sino-US trade deal.

RISK APPETITE IMPROVES

The New Zealand and Australian dollars, widely seen as proxies for risk assets, advanced 0.5 per cent to $0.58790 and added 0.3 per cent at $0.639, respectively.

China’s yuan hit a six-month high at 7.2001 yuan per dollar.

“Although the de-escalation of the trade war benefits both economies, the agreement… is likely to be viewed as a particular victory for China,” ING economist Lynn Song said.

“The reduction of tariffs on China is a sufficient enough reduction to allow for more or less a return of normal trade.”

Meanwhile, geopolitical tensions also appeared to ease over the weekend, further supporting risk sentiment.

India and Pakistan announced a ceasefire following four days of fighting between the nuclear powers which had rattled markets.

Ukrainian President Volodymyr Zelenskiy said he was ready to meet Russian leader Vladimir Putin in Turkey on Thursday for direct talks. That would be the first negotiations between the two countries since the early months of Russia’s 2022 invasion.