August 6, 2018 / 11:46 AM / 4 months ago

FOREX-Dollar extends two-week winning streak on trade fears; euro falters

* FX markets in caution mode as high-yielding currencies slip

* Graphic: World FX rates in 2018 tmsnrt.rs/2egbfVh (Updates prices)

By Saikat Chatterjee

LONDON, Aug 6 (Reuters) - The dollar rose on Monday, building on two consecutive weeks of gains, as investors bet that trade war rhetoric and a strong U.S. economy would continue to drive the currency higher.

Against a broad basket of currencies, the dollar rose a third of a percent to 95.451 and is within striking distance of more-than-one-year peak of 95.652 reached on July 19.

"The U.S. economy is doing well and the Fed is moving towards a more predictable path of interest rates than earlier which has prompted us to change our underweight positions on U.S. debt to neutral in some portfolios," said Paul Eitelman, a senior investment specialist at Russell Investments.

The dollar's gains has been more pronounced against emerging-market currencies as investors bet that an escalation in trade war concerns would hit these export-oriented economies harder.

Since mid-April, the dollar index has gained 6 percent while an emerging-market local currency bond exchange traded fund has fallen more than 10 percent over the same period.

The dollar gained against emerging-market currencies, including the Turkish lira, which weakened 0.6 percent to a record low of 5.12 to the dollar.

The United States announced late on Friday it was reviewing Turkey's duty-free access to U.S. markets – a move that could affect nearly $1.7 billion of Turkish imports.

Chinese stocks slumped nearly 2 percent as Beijing proposed tariffs on $60 billion worth of U.S. goods on Friday, while a senior Chinese diplomat cast doubt on prospects of talks with Washington to resolve the conflict.

DEFENSIVE BIDS

With Friday's U.S. jobs data broadly indicative of a strong economy and July inflation data due later this week, markets are primed for a further increase in U.S. Treasury yields, which should support the dollar.

Inflation data this week should support that trend. ING strategists believe a report later this week will show that U.S. inflation has reached 3 percent, indicative of a strong economy. A Reuters poll predicts a similar increase.

That has also prompted hedge funds to only slightly trim their dollar long positions this week with overall bets still at their biggest in more than a year and a half.

"In currencies, we have seen defensive currencies like the U.S. dollar strengthen," said James Bateman, CIO of the multi-asset strategy team at Fidelity Investments.

"While the consensus view may be that we’ve had a bit of a slowdown but things are stabilizing, it is equally possible that these are early cracks in the ice."

Currency markets remained cautious, with high-yielding currencies such as the Australian dollar on the back foot.

China's central bank said it would set a reserve requirement ratio of 20 percent from Monday on financial institutions settling foreign exchange forward dollar sales to clients, effectively raising the cost for investors of betting against the yuan.

Britain's pound sank to an 11-month low as comments by officials about a no-deal Brexit stoked fears Britain would crash out of the European Union without securing a trade agreement.

Elsewhere, the euro held at a five-week low of $1.1533 as German industrial orders fell more than expected in June, posting their steepest monthly drop in nearly a year and a half.

Reporting by Saikat Chatterjee, editing by Larry King

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