Forex market turns cautious as Trump-Xi summit draws near

The safe-haven yen advanced to a one-week high against the dollar and a 4-1/2-month peak versus the euro on Tuesday, as investors grew cautious about a possibly contentious meeting between US President Donald Trump and Chinese President Xi Jinping.

Trump had vowed during his campaign to label China a currency manipulator on his first day in office.

While that has not happened, a report last week said the Trump administration was reviewing the scope of its power to penalise countries whose currencies it perceives as undervalued. The report provided no details about how that would be done.

“It’s always difficult to know what components of FX the two (Trump and Xi) will focus on or what specific measure they will be looking at in order to amp up the rhetoric on currency manipulator,” said Brad Bechtel, managing director FX at Jefferies in New York.

Markets also reacted to a bombing on Monday in a St. Petersburg metro and had an eye on US employment data due later this week and France’s presidential election later this month.

In late trading, the dollar was down 0.2 per cent to 110.64 yen, after earlier sliding to a one-week low of 110.27 yen.

Economic data on Tuesday was largely positive for the dollar. The US trade deficit in February narrowed more than expected to US$43.6 billion, while US factory orders rose 0.1 per cent, increasing for a third straight month.

That should keep expectations for multiple Federal Reserve interest rate hikes this year intact.

“Our projections lean towards a continuation of this positive trend in the US economy, as well as sustained progress overall in economic data,” said James Chen, head of research at Forex.com in Bedminster, New Jersey.

“This scenario should support the potential for accelerated Fed tightening and further strengthening for the dollar going forward,” he added.

The euro dropped against the yen, off 0.3 per cent at 118.06 yen. Earlier, the euro fell as far as 117.43 yen, the lowest since November 22.

The euro earlier fell to a three-week trough versus the dollar and was last at US$1.0667, flat on the day.

Meanwhile, the Reserve Bank of Australia’s decision to keep interest rates at a record low of 1.5 per cent was not a surprise. But the Aussie dollar fell after the RBA hinted it was not too confident about domestic labour and inflation conditions.