Currencies: Dollar digests Trump comments as traders watch yuan action

Currencies: Dollar digests Trump comments as traders watch yuan action

The U.S. dollar dipped slightly against its rivals on Friday as traders digested comments from President Donald Trump in which he suggested he could slap more tariffs on China and said he wasn’t “thrilled” with the Fed raising rates.

In the full interview with CNBC which aired earlier Friday morning, the president said he was prepared to put tariffs on all $505 billion in Chinese goods imported to the U.S., once again stepping up his rhetoric in the ongoing trade spat.

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A first excerpt of the interview was published late Thursday, including Trump’s criticism of the Federal Reserve’s monetary tightening. This led the U.S. dollar to drop into negative territory following a buoyant day, as investors read the comments as an attack on the central bank’s independence.

On Friday, the ICE U.S. Dollar Index DXY, -0.61% was down 0.1% at 95.036. For the week, the gauge, which measures the greenback against six major rivals, is looking at a 0.3% increase, according to FactSet. The broader WSJ Dollar Index BUXX, -0.58% was down 0.1% at 88.76.

In the interview, Trump also touched on currencies, saying China’s yuan was “dropping like a rock.” The onshore yuan USDCNY, -0.0546% has fallen 4.4% in 2018. Both the currency and the People’s Bank of China that sets its reference rate have been closely watched by investors, some of which worry that the central bank could devalue its currency as a tactic in trade negotiations.The buck last fetched 6.7910 yuan, up 0.2% from Thursday.

The PBOC weakened the yuan by the most in two years on Friday, changing the dollar-yuan reference rate to 6.7671.

“Given the pace of the yuan’s weakness, many participants argued that officials have weaponized it,” wrote Brown Brothers Harriman currency strategists Marc Chandler and Win Thin in a note. “We find the claims unpersuasive.”

The more freely traded offshore yuan USDCNH, -0.1090% is down 4.6% in the year, and one dollar last bought 6.8166 yuan, up 0.4%.

The Chinese currency’s weakness was following a year of strength, they argued. “Second, the PBOC is easing policy while it [is] still trying to force some deleveraging.” Also, the limited value-added yuan costs incurred in production processes would mean that export prices wouldn’t be “particularly sensitive to movement’s in the yuan’s exchange rate,” the strategists said.

Finally, “the foreign exchange market is better characterized by a strong dollar than a weak yuan,” the BBH note read, adding, “while typically central banks prefer their currency move in the same drection as monetary policy, currency depreciation is a blunt tool and could complicate other Chinese policy goals, including financial stability.”

Trade remains the dominant topic of the day, with the G20 finance ministers meeting in Buenos Aires for a summit that will be focussed on trade and the global economy.

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