July 12, 2018 / 2:57 PM / 4 months ago

FOREX-Yen weakens further as inflation, trade war reward dollar

(Adds analyst quote, updates prices, changes dateline from LONDON)

By Kate Duguid

NEW YORK, July 12 (Reuters) - The U.S. dollar strengthened against the Japanese yen to a six-month high on Thursday, bolstered by solid inflation data and continuing a weeklong rally of the pair which suggests investors believe the greenback stands to benefit from a trade war.

Both the yen and the dollar are favored as safe-haven investments. But the weakness of the yen, which typically benefits more than the dollar from geopolitical instability, suggests bullish sentiment about the greenback, rather than a bid for safety.

Though some analysts initially saw trade tensions as a hindrance to the dollar, that view is no longer assumed. A Bank of America survey last week reported that investor thinking had shifted since the spring, and the market saw potential dollar-positive implications from a trade war, as the United States would be better equipped to weather a slowdown in trade than other major economies.

“(A trade war) is probably good for the dollar,” said Greg Anderson, global head of FX strategy at BMO Capital Markets. That’s because “the U.S. has a trade deficit currency, and so if you find a way to reduce that trade deficit and you have the same financial flows, then all of the sudden, flows are going to be positive for the dollar, at least relative to where they were.”

The dollar/yen rally is in its seventh trading day, with the dollar having broken through the psychologically significant barrier of 112 yen for the first time since Jan. 10 on Wednesday. On Thursday morning, the dollar hit a fresh six-month high against the Japanese currency last at 112.47.

“Normally when equity markets sell off the way they did yesterday, the Japanese yen is the best performing G10 currency, and yesterday was nowhere close to that,” said Anderson.

The dollar maintained gains made on Wednesday against most major currencies thanks in part to a report of U.S. consumer prices on Thursday which showed a steady buildup of inflation pressure that could keep the Federal Reserve on a path of gradual interest rate increases.

That followed Wednesday’s report that U.S. producer prices rose in June, leading to the biggest annual increase in 6-1/2 years.

The dollar index, which measures the currency against a basket of six currencies, was flat in the North American session at 94.78, its highest since July 3.

Stock markets in China rose more than 2 percent and the offshore yuan climbed 0.9 percent, boosting appetite for risky assets and helping push the dollar higher. (Reporting by Kate Duguid; additional reporting by Saikat Chatterjee; editing by Jonathan Oatis)

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