* Graphic: World FX rates in 2019 tmsnrt.rs/2egbfVh
By Saikat Chatterjee
LONDON, Oct 10 (Reuters) - The dollar was on track for its biggest daily drop in five weeks on Thursday against its rivals as the prospects of a partial trade deal between China and the United States fuelled appetite for trade-oriented currencies such as the euro and the Australian dollar.
Reports the United States is weighing a currency pact with China that could also see a planned tariff hike next week being suspended fueled a rally in risky assets, though trading remained volatile as negotiations got underway. “We are not surprised by the dollar weakness as a trade deal would trigger further risk appetite and the Fed also seems to be in easing mode,” said Nikolay Markov, a senior economist at Pictet Asset Management.
Against a basket of its rivals, the dollar fell 0.4% to 98.66 and was on track for its biggest single-day drop since Sept. 4.
The dollar’s weakness ignited a rally in the euro with the single currency rallying 0.5% to a two-week high at $1.10335 as hedge funds cut back their extreme short bets.
The euro has been caught in the cross fire between a protracted trade war between the United States and China as the trade-oriented economy has struggled to gain traction this year and pulling the currency down 4% so far this year.
Expectations of more rate cuts also weighed on the greenback.
Market bets for a quarter point U.S. rate cut has swelled to 85% at its next policy meeting in October compared to 53% a month earlier.
With negotiations between Beijing and Washington getting underway on Thursday, market watchers say any concessions from China would be touted as a success from U.S. officials and that might fuel further yen weakness and gains in the Aussie dollar.
“The (U.S.) President should be keen to achieve that, in particular during the election campaign. ..I think the optimism has risen repeatedly over the past few days,” Ulrich Leuchtmann, an FX strategist at Commerzbank, said in a daily note.
A currency pact would pave the way for further negotiations on core issues such as intellectual property and forced technology transfers, with reports that Beijing has offered to increase purchases of agricultural goods further signaling a thaw in trade tensions.
“It remains to be seen whether a partial trade deal will be acceptable for President Trump who wants to secure a broader agreement,” MUFG strategists said.
The Chinese currency in the offshore market gained for a second day, rising 0.3% versus the greenback to 7.1145 yuan per dollar.
The pound climbed 0.4% to $1.2247, though it remained close to a one-month low amid uncertainty over Britain’s exit from the European Union before a slew of British data.
Reporting by Saikat Chatterjee Editing by Toby Chopra and Frances Kerry