Dollar’s rise stalls as trade war fears weigh

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LONDON (Reuters) – The dollar was largely unchanged on Wednesday as markets remained cautious over the likelihood of an escalation in the trade conflict between the United States and China in the backdrop of growing weakness in the renminbi.

Other currencies hardly fared better with the euro on the back foot on reports the European Central Bank will trim its growth forecasts at a policy meeting on Thursday, while the British currency was dogged by domestic political concerns.

“Markets seem to be taking a breather from the recent volatility and we are trading ranges before the central bank meetings later in the week,” said Lee Hardman, a currency strategist at MUFG in London.

Against a basket of its rivals, the dollar slipped 0.1 percent lower at 95.13, moving away from a three-week high of 95.74 reached last week.

The Canadian dollar gained after sources said Ottawa was ready to offer the United States limited access to the Canadian dairy market as a concession in negotiations to remake the North American Free Trade Agreement.

Still, anxiety over the ongoing trade dispute between China and the United States – the world’s two largest economies – kept most investors on edge.

China’s offshore yuan traded 0.1 percent weaker at 6.8857 per dollar after dropping to 6.8888, its lowest in more than two weeks.

The weakness in the Chinese currency hit market appetite for risk with an Asian equity index down for the 10th consecutive day and emerging market currencies in the red, led by the Indian rupee as traders sold currencies perceived to be vulnerable from any escalation in the trade conflict.

The Australian dollar led major currencies lower, falling 0.3 percent to $0.7102 and not far from a February 2016 low of $0.7085.

The weakness in emerging currencies has given a boost to the dollar, further exacerbating the pain for emerging markets as that has led to an indirect tightening of domestic financial conditions as countries have rushed to protect their currencies by increasing domestic interest rates.

The dollar rose nearly 1 percent in the past two weeks, taking its gains in the past six months to more than 6 percent.

“(The) emerging market selloff seems to be broadening out and monetary and financial conditions have tightened, not boding well for the growth outlook,” Morgan Stanley strategists said.

An index for emerging-market currencies was near a 16-month low reached during the day before.

“You can’t deny that emerging markets have fallen and that has weighed on sentiment, and that has probably pushed a lot of flows to the U.S. and the dollar,” said Bart Wakabayashi, Tokyo branch manager at State Street Bank.

The euro slipped 0.1 percent at $1.1591 as data showed production at euro zone factories falling for a second consecutive month in July and by more than expected.