The dollar weakened versus major peers such as the euro and yen on Thursday due to growing expectations the Federal Reserve will pause its rate tightening cycle this year. Minutes from the Fed's December 18-19 meeting revealed that several policymakers were in favour of the US central bank keeping rates steady this year.
Broader market sentiment turned slightly cautious in Asian trade as markets waited for concrete evidence that progress is being made in US-China trade talks. MSCI's broadest index of Asia-Pacific shares outside Japan was lower by 0.6 percent, while riskier currencies such as the Australian dollar fell by 0.15 percent to $0.7155. US equity futures also turned lower, falling 0.5 percent.
The yen gained 0.2 percent to 107.90. Commodity currencies such as the Canadian dollar have been the biggest beneficiaries of improving risk sentiment this week. The loonie fetched C$1.3230, hovering close to its highest level in more than a month, thanks to a sharp rebound in oil prices over the last couple of weeks.
Also supporting the loonie was the Bank of Canada's assessment that further rate hikes may be necessary. The dollar index was steady at 95.17, after losing 0.7 percent on Wednesday. It has weakened in four out of the last five sessions as traders wager that US interest rates will stay steady in 2019.
The index gained 4.3 percent in 2018 as the Fed hiked rates four times on the back of a strong domestic economy, falling unemployment and rising wage pressures. The euro and sterling each gained marginally on the dollar, fetching $1.1547 and $1.2790 respectively. However, traders expect the strength in both these currencies to fade in the coming weeks.
"The China-US trade talks are just a first step towards easing tensions on both sides," DBS analysts Eugene Leow and Neel Gopalakrishnan said in a note. "While there was agreement on less thorny issues such as agriculture and energy, US demands for verification and enforceable targets on intellectual-property rights, transfer of technologies and non-tariff barriers may not be that easily addressed," the note said. They expect room for volatility in the lead up to the March 1 deadline where negotiations on these issues need to be concluded.
But most traders still expect market sentiment to remain positive in the medium term on expectations the Fed will not raise rates in 2019 as well as a potential trade deal in coming months between the world's two largest economies.
"The Fed has acknowledged market concerns with its language. The markets are clearly reading into this as a more accommodative stance," said Michael McCarthy, chief markets strategist at CMC Markets in Sydney.
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