June 18, 2018 / 8:24 AM / a month ago

FOREX-Euro falls and dollar nears 7-month high as trade tensions weigh

* U.S.-China trade dispute escalation hurts euro

* Yen, Swiss franc gain as investors seek safety

* Currency reaction to trade tensions limited so far

* Graphic: World FX rates in 2018 tmsnrt.rs/2egbfVh

By Tommy Wilkes

LONDON, June 18 (Reuters) - The euro fell back towards three-week lows on Monday as the escalating threat of a global trade war and a dispute in Germany’s governing coalition weighed on the single currency.

After suffering a big fall last week when the European Central Bank struck a dovish tone, the euro was pinned lower again on Monday, trading down 0.3 percent at $1.1576 and not far from its recent lows of $1.1543.

A decision by the United States on Friday to enact tariffs on $50 billion in Chinese goods was the latest move in a trade dispute between the world’s biggest economies.

Soon afterward, China’s official Xinhua news agency said Beijing would impose 25 percent tariffs on 659 U.S. products, ranging from soybeans and autos to seafood.

The worry for some investors is that these tit-for-tat developments will eventually hurt global growth and particularly Europe, given President Donald Trump has signalled that he wants to slap tariffs on automotive exports.

Tensions with the governing coalition in Germany also weighed on the euro at the start of the week. Chancellor Angela Merkel’s Bavarian allies may defy her by implementing a plan to limit immigration at the German border and risk destabilising her three-month-old coalition.

Stephen Gallo, a currency strategist at BMO Capital Markets, said that while most currencies had showed limited reaction so far to the trade tensions, the recent outlook from central banks in the euro zone and Japan showed that the dispute was starting to have an impact.

“Certainly, in this environment these central banks wouldn’t discourage a weaker currency. They have set the direction and the tone,” he said.

The dollar index rose 0.2 to 94.966, within a whisker of a 7-month peak touched on Friday after the Federal Reserve last week gave a hawkish signal on interest rates.

The yen strengthened slightly versus the dollar after data showing a big rise in Japanese exports and amid the trade tensions. The yen is usually sought out by investors in times of market stress and the Swiss franc also rose on Monday.

The dollar fell 0.1 percent at 110.50 yen, weighed down as risk appetites cooled on the back of falling Tokyo shares, with sentiment hurt by a combination of trade concerns and a strong earthquake that hit the western Japanese city of Osaka.

Still, overall currency moves were limited.

“The reaction by currencies to the trade developments has been mostly limited as the U.S. measure and China’s response were in line with expectations,” said Yukio Ishizuki, senior currency strategist at Daiwa Securities in Tokyo.

“A further escalation of U.S.-China trade tensions is of course a risk scenario. But the current tariffs, even if implemented, will hardly dent the global economy and the market also has to ponder about a scenario in which the two countries try to defuse tensions.”

Commodity-linked currencies sagged on the back of sliding crude oil prices.

The Canadian dollar traded at C$1.3181 per dollar after retreating to a one-year low of C$1.3210 on Friday.

The Australian dollar was little changed at $0.7443 after plumbing a five-week low of $0.7426.

Brent crude futures fell to a six-week low of $72.45 a barrel on Monday in the wake of reports that top suppliers Saudi Arabia and Russia would likely increase production at the June 22 OPEC meeting in Vienna. (Additional reporting by Shinichi Saoshiro in TOKYO; Editing by Toby Chopra)

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