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Dollar Strengthens as U.S.-China Tensions Rise

27 May 2020

The U.S. dollar bounced in early European trade Tuesday amid rising risk aversion given the mounting tensions between China and the U.S. over the new security law for Hong Kong. 

At 2:45 AM ET (0645 GMT), the U.S. Dollar Index, which tracks the greenback against a basket of six other currencies, stood at 99.207, up 0.3%, USD/JPY rose 0.1% to 107.56, while GBP/USD fell 0.2% to 1.2308.

Protests occurred in Hong Kong Wednesday as the national security law - which critics have called a direct attempt to curtail the city's unique freedoms - underwent a second reading in the city’s Legislative Council.

U.S. President Donald Trump has promised a U.S. reaction to the law by the end of the week. Meanwhile, China retaliated by threatening countermeasures against any U.S. action, including sanctions.

“We are in a broad risk-on trend, but the only thing that can change this is the U.S.-China relationship,” Junichi Ishikawa, senior FX strategist at IG Securities, told CNBC. “More problems between these two countries would slow the dollar’s recent decline and potentially lead to dollar buying as a safe haven.”

At 2:45 AM ET, the yuan, often seen as a barometer of relations between the world's two biggest economies, slid 0.4% to 7.1604 per dollar on Wednesday, taking its four-week decline to 1%, and edging toward its record low of 7.1965 per greenback set in September last year.

The Australian dollar also weakened, linked as it is to the performance of the Chinese economy, falling 0.2% to 0.6639.

Another currency in focus Wednesday is the euro, after Isabel Schnabel, a member of the European Central Bank’s executive board, in an interview with the Financial Times, made it clear that the central bank is ready to act and use any instrument "if it judges that the medium-term inflation outlook has worsened". 

“This is another comment similar to the French Central Governor's made earlier this week, that the ECB will act if needed,” said analysts at Danske Bank, in a note to clients. “We believe this raises the probability that the ECB will increase the PEPP (Pandemic Emergency Purchase Programme) at next week's ECB meeting.”

This comes as the latest estimates from INSEE, the French national statistics bureau, suggested that France's economy is on course to contract 20% in the second quarter as the country emerges from a nationwide coronavirus lockdown.

That would mark a sharp deterioration in France's recession after the euro zone's second-biggest economy contracted 5.8% in the first quarter.



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