The dollar fell more than half a percent against the Japanese yen on Wednesday as the departure of a top economic adviser to US President Donald Trump raised concerns that tensions over a global trade war were entering a new heightened phase. Market watchers said the departure of economic adviser Gary Cohn, a former Wall Street banker, would embolden protectionist forces in the US administration as Trump seeks to impose hefty tariffs on steel and aluminium.
The greenback held just above a 14-month low against the yen as investors took shelter in the low-yielding currency on concerns the outbreak of a trade war would derail global growth at a time when US deficit is seen expanding sharply on Trump's fiscal stimulus plans. "The cleanest way to trade the risk aversion and the trade war theme is to be short dollar/yen but it is tricky if risk aversion dominates and that could fuel a safe-haven bid at some point of time for the dollar as well," said Elsa Lignos, global head of FX strategy at RBC Capital Markets based in London.
The dollar tumbled 0.6 percent to 105.45 yen its lowest since Monday and within touching distance of a 14-month low of 105.24 hit last Friday. Against a basket of currencies, the dollar was a shade lower at 89.53. Cohn's departure comes against the backdrop of a series of steps by the Trump administration to assert protectionist policies, including withdrawing the United States from the Trans-Pacific Partnership, instigating a renegotiation of NAFTA and imposing hefty import tariffs on some targeted products. "The voices of reason in the White House are dwindling and the risk of a trade war is increasing," Commerzbank strategists wrote in a daily note.
Elsewhere, the euro climbed to a 2-1/2 week high after data confirmed the euro zone economy grew by 0.6 percent in the final quarter of last year, European statistics agency Eurostat said, ensuring that the single currency bloc expanded at its fastest rate in more than decade last year. Some investors such as Bank of America Merrill Lynch said policymakers may remove an easing bias from its policy statement as early as a policy meeting on Thursday and likely upgrade its growth and inflation forecasts.
The single currency's rise was not limited to the dollar, with the euro breaking out of a 3-1/2 month range against the sterling. It was up 0.3 percent at 89.60 pence on the day. Sterling remained on the back foot against the dollar as well, after a draft EU text outlined a much more limited cooperation with Britain after its departure from the European Union than London had called for. Elsewhere, the Canadian dollar was on the back foot, with the currency down 0.4 percent against the greenback before a policy meeting later in the session where the central bank was likely to hold interest rates.
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