By Peter Nurse – The dollar weakened in early European trade Thursday, with signs of a recovery in Europe boosting sentiment despite heightened tensions between the U.S. and China.

At 3:10 AM ET (0710 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, was down 0.1% at 94.808, just off the four-month low of 94.773 seen earlier.

Elsewhere, was largely flat at 107.09, was flat at 1.2731, while was up 0.2% at 1.1587, having reached 1.1593, a 21-month high.

Helping the euro, and general risk-taking sentiment, was Germany’s Gfk survey coming in better than expected earlier Thursday, suggesting that Europe’s largest economy is on the path to recovery.

The forward-looking consumer sentiment index rose to -0.3 in August, better than the -5 expected and the -9.6 seen in July. It has gained almost 23 points since its low of minus 23.1 points in May.

This comes in the wake of the European Union leaders agreeing a substantial stimulus plan to help the region rebuild from the damage caused by the Covid-19 pandemic.

Still, there are dangers to the risk-on tone.

Tensions are escalating between the two largest economies in the world, with the United States ordering China to close its consulate in Houston amid accusations of spying.

“Investors may turn defensive on Thursday with market players awaiting possible retaliation from China,” said analysts at ING, in a research note.

The yuan is a barometer of Sino-U.S. relations and it now trades around the 7.0 level, having fallen to a one-week low of 7.0174 per dollar in offshore trade on Tuesday.

Attention will also be on the release of the weekly data early in the U.S. session, after last week’s release suggested the improvement in the U.S. labor market since April may be petering out.

Elsewhere, has held relatively steady at 6.8482 ahead of the latest rate-setting meeting by Turkey’s central bank. 

Most market players expect the bank to leave the key rate unchanged at 8.25% for a second month, but the pressure is rising on it to start lifting borrowing costs as the inflation outlook deteriorates.

“With recovering domestic demand and increasing price pressures, the next move will be a hike,” said analysts at JPMorgan Chase, in a research note, reported by Bloomberg. “We have the first hike in the first half of 2021, but a sharper-than expected demand recovery could lead to heightened risks to price and financial stability, encouraging the central bank to act earlier.”


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