Dollar set for second week of declines but outlook bullish

The dollar index edged 0.1% lower to 93.61, putting it on track for a second straight week of falls

  
A picture illustration shows U.S. 100 dollar bank note and its reflection taken in Tokyo August 2, 2011. Image used for illustrative purpose.

A picture illustration shows U.S. 100 dollar bank note and its reflection taken in Tokyo August 2, 2011. Image used for illustrative purpose.

REUTERS/Yuriko Nakao

LONDON - The U.S. dollar slipped against its rivals on Friday and is set for a second consecutive week of decline as news that heavily-indebted property firm China Evergrande Group had averted a default buoyed appetite for risky assets.

Concerns over the embattled property developer whose liabilities are equal to 2% of China's gross domestic product had sent investors flocking to the perceived safe-haven currencies like the U.S. dollar and government debt.

Worries of economic contagion have seen swathes of other heavily-indebted developers hit with credit rating downgrades.

But days before a deadline that would have plunged the embattled developer into formal default and sent shockwaves through global markets, the company had supplied funds to pay interest on a U.S. dollar bond. 

"So while this is good news in terms of a formal imminent default being avoided over the weekend, uncertainty is set to remain high until there is further clarity on Evergrande’s position and the position of other property companies in China," MUFG strategists said in a daily note.

The dollar index edged 0.1% lower to 93.61, putting it on track for a second straight week of falls.

But the broader market narrative remained supportive of more U.S. dollar gains as rising bond yields on the back of firmer inflation expectations are expected to lend support to the greenback.

Yields on 10-year U.S. Treasury notes held near their highest levels this year at 1.7% while yield differentials between comparable U.S. and German debt held at a chunky 177 bps.

Moreover, rising expectations that the U.S. Federal Reserve will be among the leaders to tighten monetary policy before other major central banks is also prompting investors like UBS Wealth Management to keep the dollar as its most preferred currency in its portfolio.

Elsewhere, the Australian dollar was at $0.7498, off Thursday's three-month top, as the boost to the China-exposed currency from Evergrande's news was outweighed by action from the Reserve Bank of Australia to stem a bond sell-off, as well as the pause in energy price rises.

The RBA said on Friday it had stepped in to defend its yield target for the first time in eight months, spending A$1 billion ($750 million) to dampen an aggressive bonds sell-off as traders have bet on inflation pulling forward rate hikes. 

Elsewhere, the euro was little changed at $1.1627, while the yen wobbled within sight of its multi-year lows, with one dollar worth 114.01 yen, compared with 114.69 earlier in the week, a four-year low.

(Reporting by Saikat Chatterjee; Editing by Emelia Sithole-Matarise) ((saikat.chatterjee@thomsonreuters.com; +44-20-7542-1713; Reuters Messaging: saikat.chatterjee.reuters.com@reuters.net))


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