Dollar rally fizzles on euro bounce; German inflation in focus

By Saikat Chatterjee

LONDON (Reuters) - The dollar turned lower on Thursday, giving up early gains as rising inflation in some German regions prompted some traders to buy the euro, though rebalancing flows for the half year checked sharp losses.

With concerns about trade dominating global market sentiment, pushing stock markets and other risky assets into the red, perceived safe-haven currencies including the Japanese yen and the Swiss franc were well supported.

“Markets are moving into a more volatile phase and if that is going to be the case then investors will start repricing the extent to which U.S. central bank will raise interest rates in the coming months,” said Hans Redeker, global head of FX strategy at Morgan Stanley based in London.

Against a basket of currencies, the dollar edged away from a near one-year high of 95.53 hit last week and was trading in negative territory on the day at 95.24.

Against the euro, the dollar was on the back foot after data showed inflation in some German regions held this month above the target rate set by the European Central Bank.

The single currency was trading 0.2 percent higher at $1.1572 per dollar. Against sterling, the euro hit a near two-month high at 88.40 pence.

Currencies remained rangebound as mixed signals on the trade dispute between Washington and its trading partners kept sentiment subdued.

U.S. President Donald Trump said on Wednesday he would use a strengthened national security review process to block Chinese acquisitions of sensitive American technologies, a softer approach than imposing China-specific investment restrictions.

There was some confusion about Washington’s trade intentions, however, with U.S. shares dropping after White House economic adviser Larry Kudlow told Fox Business Network that Trump’s plan did not indicate a softened stance.

“The latest headlines indicate a slightly softer stance but markets would be wary of reading too much into it for now, which explains the strength of the yen and the franc,” said Thu Lan Nguyen, an analyst at Commerzbank in Frankfurt.

Though the yen showed some weakness overnight, it remains firmly below its 2018 high of above 111 yen per dollar, hit last month. The Swiss franc, another risk barometer, also remains firmly below 1.16 per euro, a level considered too strong for the central bank’s comfort.

Among other major event risks is an EU summit starting on Thursday, from which Brexit-related headlines might sway the pound. In recent days, however, sterling has been moved more by expectations of UK rate changes.

The Australian dollar bounced modestly after sliding the previous day on the U.S.-China trade tensions. The Aussie was up 0.2 percent at $0.7356 after plumbing a 1-1/2-year trough of $0.7323 on Wednesday.

“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,” said Yukio Ishizuki, senior currency strategist at Daiwa Securities in Tokyo.

Reporting by Saikat Chatterjee; Additional reporting by Shinichi Saoshiro in TOKYO; editing by John Stonestreet