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Safe-haven yen, Swiss franc fall on U.S.-China trade deal optimism

Kitco News

NEW YORK (Reuters) - The safe-haven yen and Swiss franc slid on Tuesday, as growing signs the United States and China are inching closer to a trade deal boosted risk appetite and spurred investors to seek higher-yielding currencies.

On the flip side, trade-oriented currencies including the Australian dollar surged, with the Chinese currency climbing to a three-month high against the greenback.

A decision by the Chinese central bank to trim lending rates by only 5 basis points also increased overall risk-taking.

China is pushing U.S. President Donald Trump to remove more tariffs imposed in September as part of a “phase one” U.S.-China trade deal, which is expected to be signed later this month, people familiar with the negotiations said.

“The prospects that the U.S.-China deal could include some rolling back of existing U.S. tariffs helped underpin risk appetites,” said Marc Chandler, chief market strategist at Bannockburn Global Forex in New York.

In mid-morning trading, the U.S. dollar rose 0.3% against the yen to 108.94 yen JPY=, and was up 0.4% versus the Swiss franc at 0.9918.

The yen and Swiss franc tend to strengthen in times of geopolitical tension and financial stress.

Gains against the yen and Swiss franc pushed the dollar index up 0.3% to 97.774 .DOXY.

The yuan traded in the offshore market jumped to its strongest level since Aug. 5 at 6.9838 CNH=D3. The onshore yuan also posted its strongest close since Aug. 2. CUNY=CFXS.

The currency held its gains even after China’s central bank cut its one-year medium-term lending facility (MLF) rate for the first time since early 2016, though it opted for a 5 bps cut, which Commerzbank called “tiny.”.

China and the United States have imposed tariffs on each other’s goods in a trade war that has dragged on for 16 months and raised the specter of a global recession.

Kit Juckes, head of FX strategy at Société Générale, said the agreement would probably mark a truce rather than peace but added that “the chance of getting a first-stage deal seems to be quite good.”

The optimism spilled over into other currencies, with the Australian dollar AUD=D3 close to recent three-month highs and the highest versus the yen since the end of July AUDJPY=. It was not much moved after the central bank left monetary policy unchanged, as expected. The New Zealand dollar rose 0.3% NZD=D3.

The euro, however, was down 0.4% against the dollar at $1.1091 EUR=EBS.

Societe Generale’s Juckes said the euro would be one of the last currencies to benefit from improved risk sentiment, noting that Monday’s data showing Polish manufacturing activity in its sharpest downturn in 10 years had taken the wind out of the euro’s sails.

Central European states such as Poland are a key market and investment destination for euro zone companies.

Reporting by Gertrude Chavez-Dreyfuss; Additional reporting by Elizabeth Howcroft in London

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