Dollar resumes advance ahead of jobs data on renewed U.S.-China tensions

LONDON (Reuters) – The U.S. dollar rebounded whilst other major currencies weakened on Friday after President Donald Trump took steps to ban transactions with the Chinese owners of two popular mobile apps.

The U.S. dollar is rebounding after a persistent sell-off in the past few weeks on the back of a combination of rising U.S. coronavirus infections, a steady decline in Treasury yields, and a lack of consensus in Washington over additional fiscal stimulus.

Trump on Thursday issued an executive order banning transactions with ByteDance, the Chinese company that owns the video-sharing app TikTok, and with Tencent Holdings Ltd (0700.HK), which owns the WeChat messaging app.

The U.S. dollar strengthened even though data on employment in the United States is expected to come in weaker, but with expectations being so low, any surprise to the upside would push the dollar higher, analysts said.

“What matters now for currencies is still the economic outlook,” said Esther Maria Reichelt, currency analyst at Commerzbank, adding that key is still which countries are emerging after coronavirus as winners.

“It’s easy for the U.S. dollar to find reason to appreciate again,” Reichelt said.

Non-farm payrolls due later on Friday are widely expected to show U.S. jobs creation slowed in July from the previous month, indicating a resurgence in coronavirus infections is undermining the economic recovery there.

The euro retreated from its highs and last traded down 0.5% at $1.1822 EUR=EBS, while the British pound also fell 0.4% to $1.3091 GBP=D3.

Other major currencies also weakened against the dollar, including the Japanese yen, which last traded weaker versus the U.S. currency at 105.67 JPY=EBS.

The Australian dollar fell, hurt by concerns about worsening U.S.-Chinese relations and the Reserve Bank of Australia’s downbeat assessment of the local economy. It was last down 0.5% at 0.72 AUD=D3.

The resurgent dollar is showing that any shift in investors’ appetite for risk can quickly revive demand for the U.S. currency.

Graphic – Dollar: here

U.S. Republicans and Democrats have so far failed to reach an agreement on the cost of fiscal stimulus measures that many investors say is necessary to prevent the economy from losing more momentum.

The dollar is at its most oversold level in over 40 years, investment bank Morgan Stanley said on Friday, adding it had now shifted from its dollar-bearish stance and turned “tactically neutral” on the U.S. currency.

Implied volatility gauges in the foreign exchange market captured by the Deutsche Bank index .DBCVIX rose back to the April levels, indicating traders were bracing for future price swings.

Bank of America analysts said that realised volatility – the actual move in prices – was at its highest since 2009. They said they have hedged U.S. election risks in November by buying six-month USD/CHF options. They have also bought six-month EUR/AUD options to protect against heightened U.S.-China tensions.

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