Aussie, kiwi steady as dovish Fed keeps lid on dollar

Illustration photo of Australian dollars
Australian dollars are seen in an illustration photo February 8, 2018. REUTERS/Daniel Munoz

February 1, 2019

By Vatsal Srivastava

SINGAPORE (Reuters) – The Australian and New Zealand dollars held steady versus the greenback on Friday, as the Federal Reserve’s more dovish stance and improved prospects for a U.S.-Sino trade deal boosted investor risk appetite.

On Wednesday, the U.S. central bank held interest rates steady as expected but discarded pledges of “further gradual increases” in interest rates, and said it would be “patient” before making any further moves.

Broader risk sentiment was also bolstered after U.S. President Donald Trump said on Thursday he would meet with Chinese President Xi Jinping soon to try and seal a comprehensive trade deal as the top U.S. negotiator reported “substantial progress” in two days of high-level talks.

“I expect the Aussie and kiwi dollar to gain versus the dollar in coming weeks on the back of a more dovish Fed,” said Sim Moh Siong, currency strategist at Bank of Singapore.

The yen was steady at 108.8 after hitting a two-week high in the previous session.

“Dollar/yen is expected to remain weak given a dovish Federal Reserve but we can expect a bigger move down if there is a return of risk-off sentiment,” added Sim.

“There is still a lot to worry about outside the U.S. with growth in Europe and China slowing.”

The Australian dollar was steady at $0.7266. The Aussie hit $0.7295, its highest since Dec. 5 on Thursday. The kiwi was at $0.6969, marginally higher versus the greenback.

The Canadian dollar was also steady at C$1.3128 in early Asian trade. The dollar has eased by 1.1 percent against the loonie over the last two sessions.

The dollar index, a gauge of its strength versus six major peers was relatively unchanged at 95.55. The index is set to end the week in the red, after losing 0.6 percent of its value last week.

Trade talks between the United States and China could also have an impact on the dollar, which has acted as a safe-haven in times of uncertainty.

President Trump said he wanted a “very big” trade deal with China, but he signaled there could be delays if talks fail to meet his goals of opening the Chinese economy broadly to U.S. industry and agriculture.

Analysts say a comprehensive trade deal between the world’s two largest economies would most likely boost risk sentiment and lead to a weaker dollar.

Markets would be focusing on U.S. jobs data due later on Friday. Analysts note that any weakness in the labor market and a fall in wage inflation would only reinforce the dovish outlook for the dollar this year.

The euro was flat at $1.1446 after having fallen 0.3 percent in the last session. The single currency has not managed to gain despite broader dollar weakness as growth and inflation in the euro zone remain weaker than expected.

Indeed, Jens Weidmann, the Bundesbank president and a member of the European Central Bank Governing Council, painted a bleak picture of the German economy on Thursday, saying the slump in Europe’s largest economy will last longer than initially thought.

Sterling, which is grappling with troubles of its own on uncertainty over a deal to avoid a chaotic British exit from the European Union, was flat at $1.3109. Analysts expect the British pound to remain volatile in the coming weeks.

(Editing by Jacqueline Wong)

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