Dollar retreats; more positive news needed to keep rally going

Investing.com - The U.S. dollar slipped lower Thursday, handing back some of the recent gains with the uncertain global trade situation still firmly in focus.

At 04:25 ET (08:25 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, dropped 0.4% to 99.205, after a sharp rebound from a three-year low in the previous session.

Dollar rally pauses

The dollar had traded higher Wednesday after U.S. President Donald Trump backed away from threats to fire Federal Reserve Chair Jerome Powell while expressing optimism over potential trade negotiations with China, saying a potential deal could lead to a “substantial” reduction in tariffs.

However, this fresh leaning hasn’t lasted long with traders seemingly requiring more positive news for the dollar rally to continue.

“There isn’t a G10 currency with a higher positive beta to news of tariff de-escalation than the dollar. What we have seen in the past few weeks is a clear skew towards bearish USD sentiment which mirrored a lack of trust in the U.S. as an investment environment,” said analysts at ING, in a note.

“Markets will be highly tempted to sell the dollar in the rallies at the slightest indication that Trump’s more conciliatory tone on China and the Fed is changing. In other words, investors will be seeking confirmation of the more optimistic stance on U.S. assets to justify further dollar gains.”

Euro boosted by German Ifo

In Europe, EUR/USD traded 0.7% higher to 1.1389, with the single currency still some way from the over three-year high seen at the start of the week, but benefiting from German business morale unexpectedly rising.

The Ifo institute said earlier Thursday that its business climate index rose to 86.9 in April from 86.7 in March.

This came as a surprise, especially after data released on Wednesday showed that business activity in Germany’s private sector contracted this month.

“The 1.130 area is key: in the past couple of weeks, attempted EUR/USD corrections faced heavy buying interest around that level,” said ING. “A decisive break below 1.130 can open the door for a bigger leg lower and probably signal a shift in interest to rebuild some strategic dollar longs.”

GBP/USD edged 0.4% higher to 1.3300, after the previous session’s sharp retreat.

Yen gains on trade reports 

In Asia, USD/JPY traded 0.5% lower to 142.66, with the Japanese yen gaining following reports that Japan’s Economy Minister Ryosei Akazawa will visit Washington from April 30 to May 2 to engage in a second round of negotiations concerning U.S. tariffs on Japanese goods.

The Financial Times also reported on Wednesday that U.S. President Donald Trump is planning to exempt carmakers from certain tariffs tied to Chinese imports and metals.

Japan currently faces a 25% U.S. tariff on automobiles and a paused 24% duty on certain steel products.

USD/CNY traded 0.1% higher to 7.2936 in a muted session, with traders still cautious about the outcome of Trump’s trade policies.