August 24, 2018 / 4:35 AM / 8 months ago

FOREX-Aussie rallies as Morrison elected Liberal leader; Powell speech eyed

* Treasurer Morrison to become Australia’s next prime minister

* U.S.-China tariff talks end with little progress

* Investors await Fed chair Powell’s speech due at 1400GMT

By Tomo Uetake and Daniel Leussink

TOKYO, Aug 24 (Reuters) - The Australian dollar gained half a percent on Friday, reversing earlier losses, after the ruling Liberal party voted in a new leader, ending a political crisis that knocked investor confidence this week.

“The Australian dollar rose just as much as it shed quite a lot over the past week due to domestic political uncertainty,” Shinichiro Kadota, senior forex and rates strategist at Barclays Bank in Tokyo.

Treasurer Scott Morrison will become prime minister after winning a three-way battle for the leadership of the Liberal party on Friday, with incumbent Malcolm Turnbull not contesting the party ballot.

The Aussie dollar tumbled 1.4 percent on Thursday to become the worst performing G10 currency, after hitting its lowest since January 2017 of A$0.7202 last week, as the country was gripped by political uncertainty.

“However, things are not so rosy in the longer term. The Aussie dollar cannot stand aloof from fears of a U.S.-China trade war and the Reserve Bank of Australia has taken a cautious stance towards monetary policy,” Kadota added.

The dollar held onto recent gains after U.S. and Chinese officials ended two days of trade talks without any major breakthroughs.

The talks between the two nations ended as their trade war escalated on Thursday after a new round of U.S. tariffs kicked in on $16 billion worth of imports from China, followed immediately by reciprocal tariffs from China.

As a safe haven currency, the dollar has benefited from fears of international trade turmoil in recent months.

Investors are now focusing on a speech by Federal Reserve Chairman Jerome Powell to be held later on Friday at an annual meeting of central bankers in Jackson Hole, Wyoming.

“I think Powell may imply that, regardless of political pressure, the Fed may continue with rate hikes as long as the U.S. economy keeps expanding,” said Masafumi Yamamoto, chief currency strategist at Mizuho Securities.

“If the market can confirm that, then I think the dollar’s strength will continue, especially against the yen, and dollar/yen will head for 112 or the July high of around 113.”

The dollar index, which measures the greenback’s performance against six major currencies, was little moved on Friday, trading around 95.660.

The yen rose 0.1 percent to 111.465 yen. On Thursday, the dollar had gained nearly 0.7 percent against the Japanese currency after the Fed’s minutes showed officials discussed raising rates soon.

The minutes also showed that officials had examined how global trade disputes could affect businesses and households.

The euro edged 0.2 percent higher to $1.155, recouping some losses after shedding more than half a percent during the previous session.

The single currency weakened on Thursday after Italian deputy prime minister Luigi Di Maio threatened his party would vote to suspend funding to the European Union next year unless other EU countries agreed to take in migrants.

The pound was little changed but remained on the defensive on Friday as the British government told companies trading with the European Union they would face a tangle of red tape in case of a “hard Brexit”.

Sterling last traded at $1.2812 after losing more than 0.7 percent the previous day. (Reporting by Tomo Uetake and Daniel Leussink; Editing by Sam Holmes and Kim Coghill)

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