July 2, 2018 / 11:30 AM / 3 months ago

FOREX-Dollar rises towards a one-year high as tensions grow

* Graphic: World FX rates in 2018 tmsnrt.rs/2egbfVh

By Saikat Chatterjee

LONDON, July 2 (Reuters) - The dollar edged higher on Monday, closing in on last week's one-year high, as investors ramped up bets that escalating trade tensions between the U.S. and its trade partners will hurt the world's biggest economy the least for now.

Tension is growing ahead of a July 6 deadline when Washington is due to impose $34 billion of tariffs on Chinese exports, with two surveys of Chinese manufacturing out in the last few days showed a softening in activity, partly due to softness in exports.

"The dollar has begun to benefit from increased trade tensions as the relative economic impact of tariff measures comes into focus, with the U.S. economy better insulated than the rest of the G10," BNP Paribas strategists said.

Rising trade tensions have hit stock markets from Germany to South Korea and prompted investors to hedge their exposure to relatively high-yielding currencies such as the Australian dollar and the Chinese currency.

Taking note of the rising dollar, BNP Paribas trimmed its end-year forecasts for the euro and sterling for end 2018.

Latest positioning data remains broadly supportive for the dollar and is an extension of themes seen in currency markets in recent days.

Dollar longs edged higher for a second consecutive week, euro longs got trimmed again with net outstanding long positions at their lowest in nearly two months while the Swiss franc enjoyed some safe-haven support.

A rising dollar also translates into tightening financial conditions for broader financial markets given the U.S. currency's dominance in global financing and trading markets.

GERMAN CONCERNS

The euro also received a setback after German Chancellor Angela Merkel was dealt a fresh blow when her interior minister offered to quit in an escalating row over migration policy.

"More than the German political developments, the concerns over a rising trade conflict is more worrying for global markets at this stage and that is going to keep risk appetite muted," Commerzbank FX analyst Esther Maria Reichelt said.

On Monday, the single currency fell 0.5 percent at $1.1633 in early London trading. It racked up its third consecutive monthly loss against the dollar in June.

While economists expect the direct economic damage from those tariffs to be relatively contained, at least for now, many see the reversal of globalisation having negative repercussions for years to come, lowering companies' longer-term growth expectations.

Chinese stock markets fell 2.5 percent while its currency sank to more than seven-month lows as investor concerns grew about a widening trade conflict.

The dollar extended its gains against the yen to hit a new six-week high of 111.06 yen.

The Japanese currency was unmoved by the Bank of Japan's tankan business sentiment survey, which showed a slight dip in big Japanese manufacturers' sentiment.

The Australian dollar weakened 0.5 percent against the greenback while the Canadian dollar slipped 0.3 percent.

Reporting by Saikat Chatterjee Editing by Louise Ireland

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