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Dollar slips on Fed pause bets, trade optimism

The dollar on Thursday languished near a 3-month low on signs the Federal Reserve may soon pause its interest rate tightening cycle.

Minutes from the Fed’s Dec. 18-19 meeting showed that several policymakers were in favour of the U.S. central bank keeping rates steady this year.

That has weakened the dollar at a time when investors are selling safe-haven currencies due to mounting optimism about U.S.-China trade talks.

“This drop in the dollar is an overdue correction following a surprisingly robust few weeks despite the massive collapse in U.S. rate expectations,” said Ulrich Leuchtmann, a currency strategist at Commerzbank.

The dollar’s resilience can be partly explained by the fact that fears are growing about a global recession which has added to the dollar’s safe haven appeal, he said.

China and the United States have extended trade talks in Beijing, boosting oil prices and broader sentiment.

That has lifted China’s offshore yuan to its highest level since August along with recent assurances from Beijing of further fiscal boosts to the slowing economy.

The yuan has breached the key 6.8 per dollar level in both onshore <CNY=CFXS> and offshore <CNH=EBS> trade.

Commodity currencies such as the Canadian dollar have been the biggest beneficiaries of improving risk sentiment this week. It fetched C$1.3230, hovering close to its highest level in more than a month, helped by the rebound in oil prices.

The dollar index <.DXY> was steady at 95.22, 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 Fed’s recent caution is something that has never been stated so explicitly and coming on the back of last month’s bumper payrolls is a signal it likely to be much more dovish than it was last year,” said CMC Markets analyst Michael Hewson.

The euro gained marginally on the dollar, fetching $1.1547.

Economic data in the euro zone has remained consistently weaker than forecasts over the last few months, especially in France and Germany, the bloc’s economic powerhouses.

The European Central Bank is widely expected to remain accommodative in 2019, which should keep a lid on the single currency.

Source: Reuters (By Tom Finn; Additinoal reporting by Vatsal Srivastava; Editing by Toby Chopra)

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