July 2, 2019 / 12:55 AM / 21 days ago

Dollar retreats as U.S.-China trade optimism ebbs, economic headwinds eyed

NEW YORK (Reuters) - The dollar slipped from two-week highs on Tuesday, as optimism about U.S.-China trade negotiations dwindled, even as U.S. President Donald Trump turned his attention to the European Union with threats of additional tariffs.

FILE PHOTO: A woman counts U.S. dollar bills at her home in Buenos Aires, Argentina August 28, 2018. REUTERS/Marcos Brindicci/File Photo

The Australian dollar led all gainers after the Reserve Bank of Australia cut interest rates, as expected, but signaled a more balanced outlook.

Trade talks remain a key driver in the currency market, with investors realizing it may take some time before a deal is struck and for tariffs to be removed.

“We are basically back where we ‘left off’ when negotiations (with China) broke down in May, which was hardly a good spot,” said Jan Lambregts, head of global economics and markets at Rabobank in London.

This is not a just a trade spat with China, but a battle for global leadership between the world’s two largest economies, he noted.

Washington on Tuesday threatened to slap tariffs on $4 billion of additional EU goods, ramping up the pressure on Europe in a long-running disagreement over aircraft subsidies.

Risky assets overall struggled to gain momentum after Monday’s relief rally, with weak manufacturing surveys pointing to global economic headwinds.

JPMorgan’s gauge of global manufacturing fell to its weakest in almost seven years, contracting for the second month in a row, while Morgan Stanley’s surveys showed world manufacturing shrinking for the first time since 2016.

In afternoon trading, the dollar index .DXY fell 0.21% to 96.709, not far above a three-month low of 95.84 hit last week, as traders priced in aggressive interest rate cuts by the Federal Reserve this year.

The dollar dropped 0.5% to 107.88 Japanese yen JPY=.

Investors will shift focus to U.S. non-farm payrolls on Friday, with economists expecting 160,000 new jobs in June, compared with 75,000 in May.

EURO BOUNCES

The euro got a brief boost after a media report said the European Central Bank was in no rush to cut rates at a July policy meeting. The single currency EUR= last traded flat at $1.1290.

Though central bank officials are divided on the timing of the next policy move, market gauges of interest rates have increased the odds of an ECB cut later this month, thanks to a global drop in bond yields.

In other currencies, the Australian dollar rose 0.3% against the U.S. dollar to US$0.6986 AUD= after the RBA lowered interest rates by 25 basis points to a record low of 1.00%, matching economists’ expectations.

It said it would lower rates again “if needed,” which suggested that an additional rate cut was less likely than previously thought, analysts said.

Reporting by Gertrude Chavez-Dreyfuss; Editing by Andrea Ricci and Richard Chang

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