By Peter Nurse – The U.S. dollar has given back some of its overnight gains in early European trade Friday, but remains in favor as risk aversion still dominates, amid rising Sino-U.S. tensions.

At 2:45 AM ET (0645 GMT), the , which tracks the greenback against a basket of six other currencies, stood at 100.365, down 0.1%, having earlier Friday reached a three-week high. 

fell 0.03% to 1.0800 ahead of a revised German GDP reading at 4 AM, while dropped 0.1% to 107.17.

U.S. President Donald Trump ratcheted up these tensions in an interview with Fox Business Network on Thursday, stating he was disappointed with China’s failure to contain the coronavirus, that this had cast a pall over the trade deal between the two countries. He suggested he could even cut off ties.

“It cannot be ruled out that he would pull out of the phase-one trade deal and start putting tariffs back on China,” said analysts at Danske Bank, in a note to investors.

“He would risk hurting the economy even further as well as jeopardize important farmer votes in key swing states if China pulls the plug on agricultural purchases. On the other hand, he could gain politically from taking a tough stance on China.”

The yuan, which is highly sensitive to relations between the world’s two biggest economies, was on the back foot and touched a one-week low of 7.1026 in onshore trade. 

At 02:45 AM ET, traded at 7.1003, up 0.1%, as the market struggled to take a clear lead from data that showed Chinese industrial production rebounding in April but retail sales still down 7.5% on the year.

The deteriorating relationship between these two important countries is the latest potential spanner in the works of global growth, given worries about a second wave of infections and the slow reopening of economies badly hit by the social distancing measures introduced to combat the virus.

With this in mind, it may be worth keeping an eye on the Swiss franc and its relationship with the euro, with the single currency hitting an almost five-year low against the franc of 1.0510 – near the level that many deem to be the unofficial line the Swiss National Bank defends. The euro has been bumping against support at the 1.05 level for the last month.

At 02:45 AM ET, traded at 1.0516, up 0.04%.

“Recent events in Europe have led to increased tensions along many of the same stress points that have troubled the region over the last decade, and this has put renewed appreciation pressure on the traditional safe haven currency on the continent,” said Michael Cahill, an economist at Goldman Sachs (NYSE:), reported by Bloomberg. 

Elsewhere, the British pound remained under pressure at $1.2196, down 0.25%, after touching a five-week low of $1.2161 overnight as the British government reiterated its refusal to extend the Brexit transition deadline beyond December. The third round of talks on the post-Brexit trading relationship with the EU winds up today.


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