Dollar gains as Mexican tariffs averted, boosting risk sentiment

The dollar gained on Monday after the United States and Mexico reached a deal to avoid tariffs, while the euro faltered after sources said European Central Bank policymakers were open to cutting interest rates should economic growth slow.

The dollar index gained 0.39% to 96.93. The greenback had weakened last week after poor economic data encouraged investors to scale up their bets that the Federal Reserve would soon cut interest rates.

On Friday, Mexico agreed to rapidly expand an asylum program and deploy security forces to stem the flow of illegal Central American migrants. This averted a tariff war with the United States.

The Mexican peso rose nearly 2% to 19.24 pesos per dollar after trading resumed for the first time following Friday’s migration agreement.

The news that tariffs on Mexico will now be averted is the main reason the dollar had a good bounce overnight, said Richard Franulovich, head of FX strategy at Westpac Banking Corp in New York.

The U.S.-China trade war and worries that U.S. President Donald Trump will slap tariffs on Japan and Europe should keep investors averse to loading up on riskier assets.

I think the market psyche has been rattled and this is increasingly going to be a headwind for sentiment, said Franulovich. There is still the outstanding issue with China, and on top of that many other countries that are in his cross hairs.

On Monday, Trump said he believed China will make a trade deal with Washington. He also said China devalues its currency, which creates an uneven playing field, and criticized the Fed’s failure to quickly lower U.S. interest rates as “destructive.”

The euro dipped after two sources familiar with the ECB’s policy discussions said on Sunday that a rate cut was firmly in play if the bloc’s economy stagnates again after expanding by 0.4% in the first quarter. The single currency rocketed last week after the ECB said rates would stay “at their present levels” until mid-2020 instead of hinting at rate cuts as some expected.

The yen shed 0.3% to 108.65 after earlier hitting its weakest since late May, though it remains more than 3% stronger than its levels of April. Investors also sold the Swiss franc .

China’s yuan brushed its lowest since late November after weak import data reignited worries about slowing domestic demand. The offshore rate was slightly lower at 6.9532 yuan per dollar but held above Friday’s 2019 low.

Sterling was caught by the dollar’s recovery and a surprise 0.4% contraction in British gross domestic product in April. The pound fell 0.24% to $1.1304.

Source: cnbc

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