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Dollar, yuan jump after U.S. makes trade concessions to China

Kitco News

NEW YORK (Reuters) - The U.S. dollar and offshore yuan rose on Tuesday after the Trump administration said it would delay 10% tariffs on some Chinese products scheduled to begin next month, a significant concession in the trade conflict between Washington and Beijing.

The U.S. Trade Representative said it would delay tariffs on laptops and cellphones, among other products, set to be imposed in September.

The U.S. dollar clobbered the Japanese yen JPY=, last up 1.28% to 106.65 yen per dollar. The yen is a safe-haven asset which benefits in moments of geopolitical uncertainty and during economic downturns. The dollar index .DXY was 0.45% higher at 97.815, and the offshore Chinese yuan CNH= was 1.25% stronger at 7.0125.

Some analysts said they did not expect the currency trends to continue overnight.

“The huge positioning squeeze, notably on gold and yen crosses, inclusive of CNH, after the latest news should be largely done,” said Alan Ruskin, chief international strategist at Deutsche Bank.

“It is still entirely possible that rather than a resolution to the trade dispute, both sides live with a ‘new normal’ with a world of elevated tariffs, that may have carve-outs for politically sensitive goods.”

Other safe havens like Treasury debt also saw prices fall as investors moved money into riskier assets. The spread between 2- and 10-year Treasury yields US2US10=TWEB, the best-known measure of the yield curve, fell as low as 0.6 basis point, its flattest in more than 12 years. An inversion of the yield curve - when the spread falls below zero - is an indicator of coming recession.

The curve flattened because 2-year Treasury yields US2YT=RR, which move with market expectations of interest rate policy, rose as rate-cut bets were tempered.

Two to three rate cuts have been priced in by the end of the year, though on Tuesday expectations of two rate cuts increased to 49.3% from 45.7% a day prior, according to CME Group’s FedWatch tool, and bets on three cuts fell from 36.1% to 32.8%.

The U.S. dollar was also buoyed on Tuesday after the United States reported that consumer prices in July increased, though the easing of trade tensions could tamp down further inflationary pressures.

Financial markets have fully priced in an interest rate cut in September. Expectations that rates will be cut by 25 basis points rose to 95.0% from 84.6% a day prior as fewer traders bet on a more dramatic 50-basis-point cut next month.

Reporting by Kate Duguid in New York and Tommy Wilkes in London; editing by Jonathan Oatis

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