Whirlwind Day in FX Leaves Dollar Weaker After Trade Report, ECB

(Bloomberg) -- After an action-packed start to the American trading day, talk of a possible limited trade agreement between the U.S. and China took the markets by surprise and weakened the dollar.

It was a turbulent session, with the Bloomberg Dollar Spot Index earlier jumping to a session high on a European Central Bank stimulus announcement, before slumping 0.4%, the most in more than a week. The currency weakened on chatter that President Donald Trump’s administration could strike an interim deal with China -- allaying fears the trade war could escalate. The greenback tried to claw back after a CNBC report said the White House is not considering an interim deal but found little success.

In the midst of all the action, traders pared bets on additional Federal Reserve easing this year as central bank policy makers prepare to meet next week. The greenback’s advance in early morning trading drew the ire of President Trump, who tweeted that a weaker euro was putting U.S. manufacturers at a competitive disadvantage and reiterated his frustration with the Fed.

The euro reversed losses and jumped the most in a week as traders digested the stimulus package and became more optimistic about a trade agreement between the two largest economies.

The Fed cut rates on July 31 for the first time since the financial crisis and is widely expected to move down by another quarter percentage point at the meeting next week. Traders are now focused on the Fed and want more clues from the Trump administration about a possible trade agreement.

“If a deal were to get made, you would probably see the Fed slow the pace of easing and the dollar would probably rally,” said Brendan McKenna, a foreign-exchange strategist at Wells Fargo Securities LLC in New York. “I am very skeptical a deal gets made and not exactly sure what an ‘interim deal’ would really look like.”

As investors watch for any additional details about an interim deal, they have reason to remain on edge.

“We are only one tweet away from these moves reversing,” said Shaun Osborne, chief foreign exchange strategist at Scotiabank.

To contact the reporter on this story: Susanne Barton in New York at swalker33@bloomberg.net

To contact the editors responsible for this story: Benjamin Purvis at bpurvis@bloomberg.net, Debarati Roy, Greg Chang

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