Dollar Struggling over Trade War, Gov’t Shutdown

The dollar was restrained versus its peers on Thursday, limited by concerns over global growth, the US government shutdown, and a yet-unresolved US-China trade war.

“Trade tensions are the most dominant factor for investor sentiment right now and will drive market flows,” said Nick Twidale, who is the chief operating officer at Rakuten Securities.

Twidale added that investor risk appetite will only improve once concerns over the partial  US government shutdown and trade tensions fade.

The Aussie dollar was a big mover in the Asian session, trading 0.22 percent lower at $0.7126 after National Australia Bank said that it would raise mortgage rates by 12 to 16 basis points. Earlier, the Aussie was in positive territory on the backdrop of solid jobs data.

The partial US government shutdown, now on its 34^th day, has dampened investor sentiment. US Republican Senate Majority Leader Mitch McConnell said that he planned to hold a vote on Thursday on a Democratic proposal that would fund the government for three weeks.

Global growth concerns have also rattled investor appetite for risk.  On Monday, the International Monetary Fund (IMF) cut its 2019 and 2020 global growth forecasts, citing a larger-than-expected slowdown in China and the Eurozone, and said failure to resolve the tensions could further destabilize an already-slowing down the global economy.

In Asian trading, the yen was slightly higher at 109.51, after easing 0.2 percent versus the greenback in the previous session.

Last Wednesday, the Bank of Japan kept its policy unchanged. The BOJ cut its inflation estimates and cautioned of growing risks to the economy from trade protectionism and slowing global demand.

The dollar index, which is a measure of the greenback’s strength against a basket of six other major currencies, was steady at 96.06.

Markets are bearish on the outlook for the dollar this year. Traders in interest rate futures are wagering that the Federal Reserve will stand pat on rates in 2019 in the face of growing risks both at home and overseas.

All eyes will be on the euro as investors await the European Central Bank’s monetary policy announcement later on Thursday where it is all but certain to keep policy unchanged.

The common currency was slightly higher at $1.1383. The euro has shed around 1.6 percent of its value over the last couple of weeks as traders expect the ECB to remain dovish and keep monetary policy accommodative for an extended period of time. Low inflation as well as weaker-than-expected economic activity in German and France, on the other hand, may lead ECB President Mario Draghi to point toward a potentially longer-lasting shutdown.

“If the central bank lowers its growth or inflation forecasts and Draghi focuses on weaker growth, we could see EUR/USD fall to $1.12 easily,” said Kathy Lien, who is the managing director of currency strategy at BK Asset Management.

Elsewhere, the pound traded a tad higher at $1.3075, hovering near highs last seen in mid-November in a sign that traders expect Britain to avoid a catastrophic exit from the European Union.

Since Prime Minister Theresa May’s divorce deal with the EU was rejected by lawmakers last week in the biggest defeat in modern British history, lawmakers have been trying to plot a course out of the crisis, yet no option has the majority support of parliament.