Yen rises as investors flock to safe-haven assets

Parvez Jabri August 27, 2019

LONDON: The Japanese yen rose and 10-year Treasury yields fell on Tuesday as investors fled to safer assets amid worries the US-China trade conflict would get worse, days after both sides announced new tariffs.

On Friday, China said it would increase tariffs on $75 billion worth of American goods. The United States retaliated by saying it would raise existing tariffs on $250 billion worth of Chinese goods to 30% from 25% on Oct. 1.

US President Donald Trump also said he would tax another  $300 billion worth of Chinese imports 15%, rather than the 10% he had planned. Those levies go into effect on Sept. 1.

On Monday, speaking on the sidelines of the G7 summit of world leaders in France, Trump said Chinese officials had contacted US trade counterparts overnight and offered to return to the negotiating table.

Trump’s comments sparked a wave of so-called risk-on trades, which initially boosted the dollar, weakened safe-haven currencies, and lifted stock markets.

However, doubts crept in after a Chinese Foreign Ministry spokesman said he was unaware that a phone call had taken place. The Commerce Ministry, which typically releases statements on trade calls, did not respond to a request for comment.

“The yen has been one of the best-performing global currencies this year and continues to benefit from building downside risks to global growth from escalating trade tensions,” said Lee Hardman, currency analyst at MUFG.

The Japanese currency was last up 0.3% at 105.755 against the dollar. That wasn’t as strong as Monday’s gain, when it reached a three-year high, excluding the January flash crash. The yen has gained 3.5% against the dollar this year as the trade war drives traders to safe-haven assets.

The yen is “likely to strengthen further if tensions continue to build,” Hardman said.

Ten-year US Treasury yields fell to 1.5030%, keeping the yield curve inverted as two-year yields traded at 1.5182%, a sign of an impending recession.

The offshore Chinese yuan, sensitive to US-China trade disputes, was steady on Tuesday after plunging to a record low of 7.1870 against the dollar the day before. It last traded at 7.1694.

China’s central bank lowered its official yuan midpoint to an 11-1/2-year low on Tuesday, although that was stronger than traders had expected.

The Turkish lira was down by 0.2% at 5.8347 against the dollar, having plunged Monday by more than 10% in its second flash crash this year.

The fall in the lira was exacerbated by heavy selling of the currency by Japanese retail investors as they closed loss-making positions. Japanese traders are usually buyers of the lira as they seek returns in higher-yielding markets.

“Japanese retailer investors once again were caught on the wrong side of the trade being long Turkish lira,” said Piotr Matys, emerging markets forex strategist at Rabobank.

“The price action remains bullish and dollar/Turkish lira has the potential to extend its recent gains,” said Matys.

Elsewhere, major currencies were relatively stable.

The euro was trading at $1.1103 as market participants looked for signs of whether talks between Italy’s Five Star Movement and the Democratic Party would result in the formation of a coalition government. The leaders are expected to meet around 1000 GMT.

The dollar index, which tracks the dollar against six other currencies, was down 0.2% at 97.919.

The pound was up 0.4% at $1.2268 and by the same amount against the single currency at 90.51 pence as Britain’s opposition Labour Party leader Jeremy Corbyn said he would do everything necessary to prevent Britain leaving the European Union without a divorce deal on Oct 31.

Copyright Reuters, 2019

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