Dollar steady, capped by confusion over U.S. stance on China investment

TOKYO - 28 June 2018: The dollar was steady against its peers on Thursday, having failed to extend overnight gains amid conflicting signals from Washington on a proposal to restrict Chinese investment as the bitter U.S.-China trade row kept financial markets on edge.

Demand stoked by the looming end of 2018’s first half was seen supporting the dollar, which was not dented by lower U.S. yields and a slide in Wall Street shares.

The dollar index .DXY against a basket of six major currencies stood steady at 95.266 after rallying 0.65 percent the previous day.

The greenback had advanced after U.S. President Donald Trump said on Wednesday he will use a strengthened national security review process to thwart Chinese acquisitions of sensitive American technologies, a softer approach than imposing China-specific investment restrictions.

There was, however, some confusion about Washington’s intentions - with U.S. shares making an about-turn and dropping - after White House economic adviser Larry Kudlow told Fox Business Network later on Wednesday that Trump’s announced plan did not indicate a softened stance on China.

Treasury Secretary Steven Mnuchin had favored a more measured and global approach to protecting U.S. technology, using authority approved by Congress, while White House trade adviser Peter Navarro, the administration’s harshest China critic, had argued for China-specific restrictions.

“The dollar has managed to stay buoyant despite a drop in Treasury yields and risk-off in U.S. stocks due to half year-end flows, which involves U.S. investors buying back the dollar,” said Yukio Ishizuki, senior currency strategist at Daiwa Securities in Tokyo.

“It remains to be seen how long flow-driven bids can support the dollar. Headlines on trade issues will continue to dictate direction once such flows subside.”

The dollar was flat at 110.23 yen JPY=. The currency rose to 110.49 the previous day before pulling back slightly following Kudlow's comments on Trump's investment restriction plans.

The euro was a shade higher at $1.1567 EUR= after shedding 0.8 percent overnight. Concerns over political complications in Germany are expected to be a drag on the single currency.

German Chancellor Angela Merkel’s fragile coalition government faces potential collapse as the Christian Social Union (CSU), her Bavarian ally, has threatened to defy her and impose border controls unless their demands to reduce Germany’s immigration burden are met.

At the European Council Summit later on Thursday, Merkel will try to secure agreements on immigration on a continental level to appease the CSU.

“The odds are seemingly against Merkel obtaining a meaningful solution and the euro looks set to suffer further declines depending on the headlines coming out of the summit,” said Daisuke Karakama, chief market economist at Mizuho Bank.

The Australian dollar managed a modest bounce after sliding the previous day on lingering U.S.-China trade tensions. The Aussie was up 0.2 percent at $0.7356 AUD=D4 after plumbing a 1-1/2-year trough of $0.7323 on Wednesday.

China's yuan continued its slide, touching a new six-month low of 6.626 per dollar CNY=CFXS amid Sino-U.S. trade tensions.