· Signs that Asia is already feeling the pinch from a trade conflict between the United States and China pushed the U.S. dollar to a four-week high on Tuesday, while higher U.S. Treasury yields helped the move.
Data showed economic growth in Singapore was its lowest in nearly a decade in the first quarter, while in Thailand it was at its lowest in four years, raising worries that major Asian economies will be hurt by global trade tensions.
· “The situation in Asia is difficult - Thailand, Singapore, export decline in Korea - which shows that the trade conflict is hurting even without a further escalation,” said Commerzbank foreign exchange strategist Esther Maria Reichelt.
“This is the main cause behind the dollar strength. If anything, I was little bit surprised we didn’t see a more pronounced risk movement,” she added.
The United States temporarily eased trade restrictions on China’s Huawei to minimize disruption for its customers, a move which boosted Asian equities and helped the offshore Chinese yuan pull back from its weakest levels since November, where it has hovered since Friday. But the relief is not expected to be lasting.
· “Asian equity markets reacted positively to the news, but there should only be limited follow-through, as uncertainty remains high, and this uncertainty may potentially prompt companies to cut back on existing capex plans,” said Redeker.
The dollar index which measures the currency against a basket of six rivals, was 0.14% higher, last at 98.07.
Against the euro, the U.S. dollar was 0.2% stronger, last at $1.115. The single currency is being hurt by dollar strength and also by upcoming European parliamentary elections in which euroskeptic parties may fare well.
The greenback may have also been lifted by a fall in Treasury bond prices, which saw the 10-year yield rise to a one-week high of 2.435% on the back of some positive comments on the U.S. economy from policymakers.
Elsewhere, Australia’s top policymaker Philip Lowe said on Tuesday the Reserve Bank of Australia would consider the case for lower interest rates at its June policy meeting, pushing the Aussie dollar 0.54% lower to $0.687.
· The pound is once again under pressure after a strong showing from the Nigel Farage-led Brexit party in opinion polls ahead of the European parliamentary elections, along with a resurgent US dollar, battered the UK currency on Tuesday.
“The emergence of the Brexit party changed the calculus,” said Paul Jackson, head of multi-asset research at Invesco.
Sterling briefly sank below $1.27 on Tuesday, bringing the total losses for the currency this month to 2.6 per cent against the dollar. The pound also traded weaker against the euro, losing 2 per cent so far in May against the European currency.
· Fed's Evans: Trend growth in US is likely less than 2%
"Hard to escape the conclusion that trend growth in the U.S. is likely less than 2%," argued Chicago Fed President Charles Evans in a recently delivered speech.
Fed needs to plan for likelihood it will hit the zero bound of interest rates more frequently in future.
Inflation 'makeup' strategies could require short-run price increases "well above" 2%, raises possible issues of whether Fed will be believed to follow through.
The Federal Reserve's failure to meet its current inflation target could spell trouble for any effort to change to a new and even more aggressive system for managing the pace of price increases, Chicago Federal Reserve bank president Charles Evans said on Tuesday.
New strategies being debated at the Fed would make up for low inflation with faster inflation in the future, possibly prices increases of as much as 3 or even 4 percent in some years, Evans said - a level he said markets may be skeptical the Fed would ever allow. "I don’t know if they are really going to believe that we are going to follow through on this," Evans said.
· Fed’s Rosengren: Trade war is a ‘prominent downside risk’ and another reason for policy patience
The escalating trade war between China and the U.S. could increase pressure on the overall economy, according to Boston Fed President Eric Rosengren.
The central bank official said in prepared remarks Tuesday that the ongoing conflict between the world’s largest economies is a “prominent downside risk,” and added that it seems to be an “important reason for policymaker patience until this source of uncertainty is more resolved.”
· Chinese President Xi Jinping ramped up his rhetoric yet again on the trade war.
“We are here at the starting point of the Long March to remember the time when the Red Army began its journey,” Xi said at a rally in Jiangxi province during a domestic tour. “We are now embarking on a new Long March, and we must start all over again!” according to a report from the South China Morning Post.
Although he didn’t mention the U.S. or the ongoing trade war, the remarks are interpreted as a clear sign that China is not going to cave in anytime soon. Chinese Vice premier Liu He, a top trade negotiator, was with Xi during his tour, according to the report. The “Long March” refers to China’s civil war in the 1930s.
Xi also visited rare earth mining and processing facilities on Monday, the report said. There has been speculation that China could ban rare earth exports to the U.S. if the trade war escalates, according to the South China Morning Post.
· Cui Tiankai, the Chinese ambassador to the United States, said on Tuesday that U.S. negotiators have “often” backed out on partial trade deals at the last minute.
“If we review the process of trade talks between us over the last year or so, it is quite clear it is the U.S. side that, more than once, changed its mind overnight, and broke the tentative deal already reached,” Cui told Fox News.
“It is the U.S. side who changes its mind so often,” Cui added.
Cui said, as a result, China has a “no rush” attitude to restarting trade negotiations with the U.S.
Chinese Ambassador to the United States Cui Tiankai said on Tuesday that Beijing was ready to resume trade talks with Washington, but blamed the U.S. side for frequently “changing its mind” on tentative deals to end U.S.-China trade disputes.
· Oil futures were little changed on Tuesday, supported by U.S.-Iran tensions and expectations of ongoing OPEC supply cuts but under pressure from concerns about a drawn-out trade war between Washington and Beijing.
“The two powerful countervailing forces in the market right now are the Iran tensions versus the deteriorating U.S.-China trade war situation,” said John Kilduff, a partner at Again Capital in New York.
The trade war “really hits the Asian economies and the demand outlook, and this situation with Iran has the market on tenterhooks at the same time,” Kilduff said.
Brent crude futures, the international benchmark for oil prices, rose 6 cents to $72.03 per barrel around 2:35 p.m. ET (1835 GMT). U.S. West Texas Intermediate crude futures settled 11 cents lower at $62.99 per barrel.
Reference: CNBC, Reuters, FXStreet, Investing
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