Dollar dips as euro steadies after German coalition partners resolve row

Euro bank notes. (Reuters pic)

TOKYO: The dollar eased marginally against its peers on Tuesday, as the euro steadied after partners in Germany’s coalition settled a row over migration that had threatened to topple Chancellor Angela Merkel’s government.

The euro was little changed at US$1.1626 after shedding 0.45% overnight.

The euro had slipped on Monday after German Interior Minister Horst Seehofer offered to resign, but it later steadied when his Christian Social Union (CSU) party reached a deal with Merkel’s Christian Democrats (CDU) over illegal immigration, and the resignation threat was withdrawn.

“Concerns towards the euro have ebbed for the time being. But the underlying immigration and refugee theme will continue to remain a potential risk factor,” said Shin Kadota, senior strategist at Barclays in Tokyo.

The dollar remained broadly supported, meanwhile, as trade tensions propped up the greenback against commodity currencies, like the Australian dollar, and emerging market currencies whose economies are most vulnerable to a downturn in trade.

The dollar index against a basket of six major currencies inched down 0.1% to 94.955 after gaining about 0.45% the previous day.

“There’s a strong element of ‘risk off’ generated by trade concerns behind the dollar’s latest rise. That said, the dollar has managed to gain only as emerging market and commodity currencies have slid due to risk aversion,” said Masafumi Yamamoto, chief forex strategist at Mizuho Securities in Tokyo.

“A currency of a country with a large current account deficit is not usually a choice destination during risk aversion, but the dollar is high in liquidity, which is a draw.”

The Chinese yuan extended its losses on the back of nervousness ahead of July 6, when US tariffs on Chinese exports are due to take effect.

The yuan retreated about 0.6% on Tuesday to its lowest since August 2017 versus the dollar.

Commodity-linked currencies such as the Australian dollar, which is sensitive to shifts in sentiment towards China, was near a 1-1/2-year low of US$0.7311 plumbed on Monday.

The Reserve Bank of Australia (RBA) holds its monthly policy meeting on Tuesday and is considered certain to keep rates at 1.5%, where they have been since mid-2016.

Focus was on whether the RBA makes a mention of the recent US-China trade tensions.

The dollar was a shade lower at 110.790 yen after edging up 0.2% the previous day, supported by robust US economic data, higher Treasury yields and a bounce in shares on Wall Street.