Dollar rallies as trade war fears ease

Key Points
  • FX market volatility nears 2018 lows
  • Dollar/yen back above near 107 after dropping below 106
  • U.S. trade deficit widens to near 9-1/2-year high
Matt Cardy | Getty Images

The dollar rose to a two-week high against a basket of major currencies on Thursday, encouraged by a rebound on Wall Street and signs the United States may negotiate a resolution to a trade dispute with China.

The U.S. currency also climbed to a three-week peak against the yen and a 10-week high versus the Swiss franc, two safe-haven assets that investors buy in times of market turmoil.

"Boosting the dollar is the view that at the end of the day Washington and Beijing might broker a trade deal that doesn't torpedo global commerce or damage the world economy," Joe Manimbo, senior market analyst at Western Union Business Solution in Washington, said.

White House economic adviser Larry Kudlow said on Thursday he expects the United States and China to work out their trade differences over time and that trade barriers likely "will come down on both sides."

His comments prompted a recovery in the dollar. China, however, has not backed down. The nation's state news agency Xinhua said on Thursday China will win any trade war with the United States. That belief stems from the country's massive consumer market, which has been China's one advantage from U.S. manufacturers' point of view.

Beijing on Wednesday imposed tariffs on key U.S. imports including soybeans, planes, cars, beef and chemicals in response to similar measures from the United States. That had spurred a rally in the yen and a sell-off in stocks on Wednesday.

"By choosing to hurt China rather than compete with them, others will see this as economic war and the global stakes are actually much higher than they have been in the last 80 years," John Taylor, president and founder of research firm Taylor Global Vision in New York, said.

One strategist on why he's less pessimistic on the US dollar than the overall consensus

In afternoon trading, the dollar rose 0.39 percent against a basket of six currencies to 90.49. Earlier, the index hit a two-week high of 90.454. In a broader sign that global currency markets had not been rattled, a basket of currency options of the major currencies ticked towards 2018 lows of 7.8 after a spike in February.

Against the , the dollar advanced to a 10-week high and was last up 0.52 percent at 107.33.

The greenback surged to a 10-week high of 0.9637 Swiss franc, last changing hands at 0.963 up 0.24 percent.

Data on Thursday also showed that the U.S. trade deficit grew to a near 9-1/2-year high in February, with both exports and imports rising to record peaks, but the shortfall with China narrowed sharply.