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Thu, 16 Jan 2020 13:23 - Updated Thu, 16 Jan 2020 13:23

Muted reaction in currencies to US-China trade deal; dollar index falls

LONDON - Major currencies mostly shrugged off on Thursday the signing of the Phase 1 trade deal between the United States and China, since most of the issues agreed upon had been expected and the threat of tariffs was not eliminated.

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Euro/dollar, the most fluid currency pair, was last trading up 0.1% at $1.1161 EUR=EBS, after matching the one-week high of $1.1164 it reached the day before. An index that tracks the dollar against six other major currencies fell to an eight-day low of 97.134 .DXY.

Beijing and Washington touted the Phase 1 deal, signed late on Wednesday at the White House, as a step forward in resolving their trade dispute. U.S. Vice President Mike Pence said Phase 2 discussions had already begun.

Yet market enthusiasm was checked, because much of the agreement was priced in and it addressed few of the issues that led to the conflict in the first place.

“Yesterday’s signing of the Phase 1 trade deal provided confirmation of the progress made in trade talks since last summer. The details of the deal were broadly in line with expectations, which have dampened the market impact overnight,” said Lee Hardman, currency strategist at MUFG.

Analysts said the agreement did not eliminate tariffs, was vague on enforcement, and made no real progress on host of problems. Some were also sceptical that purchase targets set out in the deal are realistic.

“Now that the Phase 1 deal has been signed, market participants’ focus will soon switch to whether China meets the commitments of the deal, and if progress is made towards a Phase 2 deal ... Higher tariffs remain a live threat if there is a lack of progress on either front,” Hardman said.

China pledged to buy at least an additional $200 billion worth of U.S. farm products and other goods and services over two years.

In return, the Phase 1 deal cancelled planned U.S. tariffs on Chinese cellphones, toys and laptops and halved to 7.5% the tariff on about $120 billion worth of other goods, including flat-panel televisions, Bluetooth headphones and footwear.

But it left in place 25% tariffs on $250 billion worth of Chinese industrial goods and components used by U.S. manufacturers and China’s retaliatory tariffs on over $100 billion of U.S. goods.

“The deal relies heavily on China’s goodwill and includes forced purchases of U.S. goods and protection for intellectual property rights and forced technology transfers,” said Sebastien Galy, strategist at Nordea Asset Management.

“Some demands are extremely hard to swallow, such as changing laws to accommodate the U.S. Overall, it feels like something that will not last more than a few months,” Galy said.

The Chinese yuan, the currency most sensitive to the trade dispute, was 0.1% higher at 6.8826 per dollar in the offshore market CNH=EBS, not far from the six-month high of 6.8662 it reached on Tuesday.

The level of 7 yuan to the dollar has been a barometer for U.S.-China tensions, so the yuan’s holding below that level showed that investors remain more or less optimistic about the trade relationship between the world’s two biggest economies and its impact on global growth.

The safe-haven Japanese yen JPY=EBS was a weaker at 109.97 per dollar, while the Australian dollar held 0.3% stronger after rising to a nine-day high at $0.6928. Both currencies are a gauge of stress.

The British pound rose to a six-day high of $1.3065 GBP=D3. Against the euro, it was trading at 85.46 pence, 0.1% higher EURGBP=D3.REUTERS.

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