May 8, 2019 / 3:06 PM / in 12 days

FOREX-Dollar flat as market weighs U.S.-China trade deal risks

(Recasts; updates prices; changes dateline from LONDON to NEW YORK)

By Kate Duguid

NEW YORK, May 8 (Reuters) - The dollar was roughly flat on Wednesday as foreign exchange traders held off from making big moves as they weighed news about progress in the trade talks between the United States and China.

Unlike previous episodes of trade tensions when the dollar benefited from an increase in trade tensions between the world’s two biggest economies, U.S. President Donald Trump’s latest threat to raise tariffs on Chinese imports has prompted market strategists to also consider the corrosive impact on the U.S. economy.

“U.S. policymakers have made it clear that the next step for the central bank will be based on incoming economic data and markets are expecting a rate cut will materialise sooner than later if trade tensions escalate further,” said Ricardo Evangelista, a senior analyst at ActivTrades in London.

Against a basket of its rivals, the dollar was 0.07% weaker to 97.56. However, against the euro, the dollar was slightly higher, up 0.08%.

Although the dollar did not benefit, safe-haven assets such as U.S. Treasury bonds saw prices rise and the Japanese yen strengthened. The yen was last 0.08% better at 110.16 per U.S. dollar.

U.S. Treasury yields fell on Wednesday with longer-dated yields hitting five-week lows as investors piled money into low-risk government debt.

Data earlier showed China’s trade surplus with the United States, a major irritant for Washington, expanded to $21.01 billion in April from a month ago, a factor that might provoke a hardening stance from U.S. officials.

Focus is on trade talks on Thursday and Friday in Washington, where Chinese Vice Premier Liu will try to salvage a deal that would avoid a sharp increase in tariffs on Chinese goods scheduled to take effect on Friday.

U.S. officials have accused China of reneging over the past week on substantial commitments made during months of negotiations aimed at ending their trade war.

The Chinese yuan in the offshore market edged 0.14% lower to 6.803 and was within striking distance of a four-month low hit on Monday.

“The threat of further escalation in the tariff war becomes real again and at the moment, it is just impossible to assign any probability to any scenario, positive or negative,” Societe Generale strategists said in a note.

Elsewhere, the euro held flat against the dollar and within recent ranges as currency traders remained undecided on the inflationary outlook for the euro zone economy and the latest developments on the trade war front.

Reporting by Kate Duguid and Saikat Chatterjee Editing by Alistair Bell

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