April 16, 2018 / 12:52 AM / 6 months ago

Dollar falls on reduced fears over protracted strike on Syria

NEW YORK (Reuters) - The dollar fell broadly on Monday on hopes that a U.S.-led strike on Syria would not lead to escalation, rekindling some appetite for stocks and other risky assets and spurring investors to reduce safe-haven holdings of the greenback.

FILE PHOTO: A U.S. Dollar note is seen in this June 22, 2017 illustration photo. REUTERS/Thomas White/Illustration/File Photo

Government data that showed a rebound in U.S. store sales in March failed to lift the dollar, which has been pressured by concerns over a trade war between the United States and China, the world’s two biggest economies.

“The action may be more limited than previously thought and that’s helped market sentiment,” Eric Viloria, currency strategist at Wells Fargo Securities in Stamford, Connecticut, said of a weekend missile strike against Syria.

The United States, Britain and France said their bombing was aimed at three chemical weapons facilities in retaliation for a suspected poison gas attack in Douma by the Assad regime.

For now, the three Western nations signalled there will be no further strikes.

The MSCI world equity index, which tracks shares in 45 nations, rose 0.51 percent, to 513.12.

An index that tracks the dollar against a basket of six currencies fell 0.39 percent, to 89.452. The dollar index hit a two-week low of 89.355 last week.

Despite widening interest rate differentials in its favour and the widest yield gap between two-year U.S. and German debt in nearly three decades, the dollar’s performance in recent months has been closely correlated to swings in risk appetite.

That is because although the U.S. central bank has kept on track in raising interest rates, broader financial conditions remained loose.

“In any case, we continue to expect healthy economic growth and positive returns for risky assets, so the dollar’s flight-to-quality attributes should not be a central driver for the time being,” Goldman Sachs strategists Zach Pandl and Lorenzo Incoronato wrote in a research note.

(Graphic: US financial conditions, rate rise, reut.rs/2JMAbzA)

In a wider measure of dollar positioning that includes net contracts on the New Zealand dollar, Mexican peso, Brazilian real and Russian ruble, the greenback posted its biggest net short position since August 2011.

The U.S. Treasury semi-annual report released late on Friday did not jolt the currency markets, with the Trump administration again refraining from naming any major trading partners as currency manipulators as it pursues potential tariffs and negotiations to try to cut a massive trade deficit with China. [W1N10G016]

Sterling was an exception. It gained 0.6 percent, rising above $1.43 for the first time since January as investors focused on data that could help shore up expectations of a May interest rate hike. [GBP/]

Additional reporting by Saikat Chatterjee in LONDON,; Shinichi Saoshiro in TOKYO; Editing by Susan Thomas and Dan Grebler

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