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|11 July, 2018

Dollar strengthens against yen, EM rallies as trade fears wane

The U.S. dollar rose to near a six-month high against the safe-haven Japanese yen on Tuesday

Image used for illustrative purpose. An employee of the Korea Exchange Bank counts one hundred dollar notes at the bank's headquarters in Seoul January 6, 2010.

Image used for illustrative purpose. An employee of the Korea Exchange Bank counts one hundred dollar notes at the bank's headquarters in Seoul January 6, 2010.

REUTERS/Choi Bu-Seok

NEW YORK - The U.S. dollar rose to near a six-month high against the safe-haven Japanese yen on Tuesday and emerging market currencies like the Mexican peso, Brazilian real and Russian rouble also rose as global economic momentum appeared so far unscathed by trade tensions, prompting investors to buy riskier assets.

Investors appear to be shrugging off the deepening trade conflict between the United States and China. Data from Europe overnight showed French and Italian industrial output had weakened, which may have initially "revived this idea that trade wars, even before they’ve started, have already begun to hit investment and activity in trading partners," said Daniel Katzive, head of FX strategy for North America, BNP Paribas.

But greater comfort with risk prevailed over the course of the trading day. "The basic thesis that nothing permanently damaging has happened thus far has remained intact," said Katzive.

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Investors may instead be focused on the positive outlook for second-quarter corporate earnings, which kick off this week. Credit Suisse projects that second-quarter revenue will grow by and earnings per share by 20.1 percent.

"Even if the trade concerns were still there, (investors) would be confronting a better earnings outlook in 2018, so that’s another consideration that’s keeping risk appetite strong," said Thierry Wizman, global interest rates and currencies strategist at Macquarie Group Limited.

Against the Japanese yen, a currency usually bought in times of geopolitical uncertainty, the greenback was up 0.5 percent to a session top of 111.35 yen, abutting a six-month high. The dollar index, which measures the greenback against a basket of six major currencies, was close to flat in late North American trading, after having risen 0.4 percent on Tuesday morning to a session high of 94.475.

Emerging market currencies rose as risk appetite returned to the market. Major currencies across Latin America strengthened. It took 2 percent fewer Mexican pesos to buy a U.S. dollar. The percentage was 2.3 percent for the Brazilian real   and 1.6 percent for the Russian rouble.

The British pound recovered some of the losses suffered Monday after two ministers quit over the government's Brexit plans. Expectations that Theresa May will survive as prime minister to start negotiating her blueprint with the European Union briefly pushed sterling into positive territory on Tuesday, though gross domestic product data in line with forecasts and the stronger dollar weighed on the currency.

(Reporting by Kate Duguid and Tom Finn; Editing by Dan Grebler and David Gregorio)

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