By Tommy Wilkes
LONDON (Reuters) – The euro rose past $1.13 and riskier currencies like the Australian dollar strengthened on Monday as optimism over a breakthrough in U.S.-China trade war talks encouraged investors.
The euro has been stuck in a trading range since November as growing weakness in the euro zone economy offsets dwindling expectations the Federal Reserve will raise U.S. interest rates again this year.
But after dropping to a three-month low on Friday, the euro has recovered, helped by renewed demand for riskier assets as hopes rose for an end to the U.S.-China trade conflict after both sides reported progress in talks.
“Generally the mood is still quite positive on the outlook for trade,” said Adam Cole, a currencies analyst at RBC Capital Markets, adding that he thought the risk-on mood would continue.
“If anything we would be running with it. You have a background of quite decent growth and a Fed that is putting rates on hold.”
However, he said a better way to play the Fed’s pausing of rate increases was in dollar/yen, as more Japanese investors choose not to hedge their purchases of dollar-denominated assets because they can already earn a decent yield after last year’s U.S. rate increase.
Cole sees dollar/yen rising to 120 yen per dollar by the end of 2019 from current levels of 110.55.
The euro ticked 0.2 percent higher to $1.1317, while the dollar index – which measures the dollar against a basket of rivals – slipped 0.2 percent to 96.755 in a quiet session with U.S. markets closed for a holiday on Monday.
Despite Monday’s gains, traders are betting on a weaker euro in the coming months. They expect the European Central Bank to maintain its accommodative monetary policy amid slow growth, tepid inflation and political uncertainties in the euro zone.
Commerzbank (DE:CBKG) analysts said the euro remained vulnerable to any flare-up in a U.S.-European trade dispute, too.
“There would be very little to report on the euro positive side if this conflict were to escalate. The smallest economic disruptions would no doubt be damaging for the euro in the light of the fragile state of the euro zone economy,” they wrote.
The Australian dollar, considered a barometer of risk sentiment, rose 0.2 percent to $0.7150.
Sterling gained 0.2 percent to $1.2918, up from last week’s one-month lows, as traders awaited the next Brexit developments.
