US Dollar on backfoot as trade talks boost Asian currencies

The dollar slipped on Tuesday and Asia's trade-exposed currencies rose after the United States and China both hailed a phone call between their top trade officials as a success.

That reaffirmed investors' faith that even as diplomatic ties between the two countries fray, the trade relationship can endure. The news lifted the Australian dollar 0.2% and nudged the Chinese yuan firmer to 6.9007.

Sentiment, and support for riskier currencies over the dollar, was also boosted by a Financial Times report which said that US authorities were considering fast-tracking approval for a Covid-19 vaccine being developed by AstraZeneca and Oxford University.

Moves were contained as markets were not expecting a breakdown of the trade deal and looking ahead to a speech from Federal Reserve Chairman Jerome Powell later in the week, which could shift the US dollar in either direction.

The broad pressure on the dollar helped the euro back over $1.18 by mid-morning in Asia and the pound rose 0.3% to $1.3102. The kiwi, weighed by expectations of negative rates in the future, struggled for headway at $0.6528.

"It's reassuring that despite all the rhetoric the US and China clearly still want to have an economic relationship," said National Australia Bank senior foreign exchange strategist Rodrigo Catril. "That adds to the feelgood vibes."

On the call, which had been originally scheduled for Aug. 15, US Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin spoke with Chinese Vice Premier Liu He.

The United States said both sides "see progress" and China's commerce ministry called the talks "constructive."

The Aussie last sat at $0.7171 and the yuan at 6.9071, just below session highs and underneath last week's peaks in a sign that some caution remains. The safe-haven yen was steady at 105.95 per dollar.

Powell Watch

The Asia-session moves return some gentle pressure to the dollar which had held up during New York trade, defying a positive mood in the equity market - which often drives dollar selling in favour of riskier currencies.

Against a basket of currencies the dollar dipped 0.1% to 93.180 and it sits at a crossroads: Flat for the month after a roughly 10% slide from late March through to early August.

Its short-term fate depends on whether Europe's economy keeps up the impression that it is outperforming the United States and on what the market thinks the Fed will do next.

For now, all eyes are on Powell's address to a virtual Jackson Hole symposium on Thursday, with investors expecting he will sound dovish and might speak to speculation that the central bank could adopt a more accommodative stance on inflation.

"If we don't get dovishness, I expect you might actually get rates rising and pop up higher in the US dollar," said Westpac FX analyst Imre Speizer.

"I think what we're seeing now is any excuse to buy back (the dollar) as the punters who have been short all the way down get quite nervous and take the money off the table."

Investors are also looking ahead to Germany's IFO Business Climate index, due at 0800 GMT, and US consumer confidence figures at 1400 GMT for clues as to the relative performance of the two economies.

Softer-than-forecast data on both continents last week suggests there is downside risk.

"If data releases confirm the negative turn in terms of macro outlook in Europe, then it will be clear euro negative," said Terence Wu, FX strategist at Singapore's OCBC Bank.

"$1.17 remains the key level that may spark a deeper sell-off, but the pair may need to breach the $1.1850/80 resistance for the trajectory to look more comfortably positive."