Renewed U.S.-China trade jitters prop up dollar

NEW YORK (Reuters) - The U.S. dollar edged up against a basket of major currencies on Tuesday as concerns about trade friction between China and the United States prompted some safe-haven buying of the currency.

An employee of a bank counts US dollar notes at a branch in Hanoi, Vietnam May 16, 2016. REUTERS/Kham

China will ask the World Trade Organization (WTO) next week for permission to impose sanctions on the United States for Washington’s non-compliance with a ruling in a dispute over U.S. dumping duties.

“The news with China is bad,” said Stan Shipley, strategist at ISI Evercore in New York. “It’s going to be a long time before it’s going to be settled.”

Anxiety over the trade dispute between the world’s two biggest economies outweighed optimism about a possible agreement on the terms of Britain’s exit from the European Union and reversed some of euro and sterling’s gains on Monday.

The Australian dollar was another casualty of the trade tension between Beijing and Washington. The currency, seen as a proxy for global growth due to Australia’s export-oriented economy, tumbled to its weakest level against the greenback since February 2016.

Still, there were encouraging signs that the Trump administration is moving toward resolving its trade issues with Canada and Europe, Shipley said.

Higher share prices on Wall Street also boosted the greenback, with the S&P 500 index up 0.46 percent.

The dollar index that tracks the greenback against six major currencies was up 0.09 percent at 95.239. It had shed more than 0.2 percent on Monday as the euro and sterling bounced after the European Union chief negotiator Michel Barnier hinted at a possible Brexit deal.

The euro was underpinned by a decline in Italian government borrowing costs after Economy Minister Giovanni Tria on Monday predicted that yields would drop as the government lays out its eagerly awaited 2019 budget.

The euro initially rose 0.4 percent to $1.16445 before turning lower in early U.S. trading. It later pared those losses to be little changed on the day at $1.15865 following a German magazine Der Spiegel report that said the executives of Deutsche Bank and Commerzbank were growing more open to the idea of a merger.

Sterling touched a five-week high against the dollar earlier on Tuesday before fading to $1.2989, down 0.3 percent on the day, according to Reuters data.

The Australian dollar was down 0.16 percent to $0.71010 after hitting its lowest since February 2016 on concerns that any damage to the Chinese economy from a trade war could hurt Australia’s exporters.

The New Zealand dollar also hovered near a 2-1/2-year low at $0.6507. China’s offshore yuan fell 0.2 percent to 6.8673, a 2-1/2-week low.

Additional reporting by Tommy Wilkes in LONDON; Editing by Bernadette Baum and Meredith Mazzilli