U.S. Dollar Turns Higher after China Comments and Eurozone Data Dent Risk Appetite

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- USD rebounds after China comments, European data hit risk appetite.

- Chinese officials lower expectations for G20 "trade war" breakthrough.

- EUR economic slowdown continues, casting shadow over global outlook.

The Dollar recovered from earlier lows Friday in response to combative statements from Chinese officials about the so-called trade war with the U.S. and after Eurozone data showed the bloc's economy losing further momentum. 

China's Commerce Ministry has blamed the U.S. for a fractious end to the Asia-Pacific Economic Cooperation summit, lowering expectations for an accord that de-escalates the trade war to emerge from next week's G20 meeting. 

Officials said in a briefing on World Trade Organization reform that last weekend's APEC summit ended without any joint communique because of actions taken by the U.S.

Wu Fuwen, vice minister of commerce and deputy representative of international trade negotiations, claims the U.S. attempted to impose its own interest on others, to the detriment of others and that he hopes the G20 summit scheduled for the end of November is not marred by a similar outcome. 

The Dollar had softened in November as markets bet the G20 meeting, during which U.S. and Chinese presidents will meet, would yield an agreement that helps bring an end the tariff fight between the world's two largest economies. 

"Investors are hoping the two countries can agree on a ‘roadmap’ towards more productive trade relationship in contrast to their public APEC confrontation in Papua New Guinea last week. If expectations are disappointed, Chinese markets will fall further, risk aversion will rise, and trade‑exposed currencies like AUD/USD should slide," warns Adam Myers, a currency strategist at Commonwealth Bank of Australia. 

President Trump has imposed 10% tariffs on $250 billion of goods imported from China each year and is threatening to target a further $267 billion if China does not change course on its "unfair trade policies".

The 10% tariff rate will automatically increase to 25% on January 01, 2019 unless the White House decides otherwise. 

China has retaliated with equal duties on a lesser value of goods imported from the U.S. and says it will not yield to the White House's demands. It also rejects allegations it facilitates theft of American companies' intellectual property. 

The "trade war" has put financial markets on edge, boosted the safe-haven U.S. Dollar and stoked fears of a possible global economic slowdown. 

"We do not envisage a quick fix, and with an understanding between the US and the EU far from certain, the EU must not take it for granted that its exports to the US will remain exempt from higher tariffs," says Dr Jorg Kramer, chief economist at Commerzbank. 

The Dollar index was quoted 0.11% higher at 96.80 during the noon session Friday after having entered the London session carrying a loss. 

The Pound-to-Dollar rate reversed earlier gains to trade -0.39% lower at 1.2825 and the Euro-to-Dollar rate fell -0.41% to 1.1356. 

Currency market moves came alongside a turn lower in both U.S. and German government bond yields, all suggesting investors' risk appetites are waning. 

China's comments, and subsequent fears about the trade war, came alongside November's volley of PMI surveys from IHS Markit which all pointed to a continued loss of economic momentum during the current month. 

The Eurozone manufacturing PMI fell from 52.0 to 51.5 in November when markets had looked for it to remain unchanged, while the services PMI declined from 53.7 to 53.1 when economists had penciled in only a minor fall to 53.6. The index has now fallen from 59.6 back in January.

PMI surveys measure changes in industry activity by asking respondents to rate conditions for employment, production, new orders, prices, deliveries and inventories. A number above the 50.0 level indicates industry expansion while a number below is consistent with contraction.

Weakening global demand amid high levels of uncertainty about the economic outlook was responsible for the fall in export orders, although the trade war and sluggish car sales were also cited specifically as other headwinds.

"A PMI headline if 52.4 is not catastrophic, but it does suggest that the growth in the Eurozone is slowing faster than markets, and the ECB, expect. Mr. Draghi recently held on to his view that risks remain “broadly balanced,” but these data suggest that the president will have to change his tune next month," says Claus Vistesen, chief Eurozone economist at Pantheon Macroeconomics.

Eurozone data matters for those dealing in Dollars because of the well documented but negative correlation the Dollar has with global economic growth. The 2018 deceleration in the global economy came alongside a pickup in U.S. growth and was behind the Dollar's resurgence earlier this year. 

The greenback converted a 4% first quarter loss into a 4.8% 2018 gain after a superior performance from the economy enabled the Federal Reserve (Fed) to go on raising its interest rate while other central banks sat on their hands. 

Changes in rates are normally only made in response to movements in inflation, which is sensitive to growth, but impact currencies through the push and pull influence they have on capital flows as well as their allure for traders.

"Loss of economic momentum in the Eurozone is proving more pronounced and persistent amid a bigger-than-expected drop of the PMI composite in November to the lowest level in almost four years. The question is what may stop and reverse the trend. For the remainder of 2018, probably not much. The near-term outlook is subdued," says Florian Hense, an economist at Berenberg Bank. 

The downbeat outlook for the Euro area economy and risk it poses to European Central Bank policy, not to mention uncertainty about the fortunes of the Chinese economy, provide plenty of reason for observers to think the Dollar rally of 2018 could endure into year-end. However, some still say it's time to think about selling the Dollar and bracing for a decline in its value. 

"Instead of strong inward foreign direct investment or other long-term flows, we see evidence that flows to the US have been into money market funds and are carry trade motivated. We expect these carry trade flows to reverse and flow out of the US as US growth slows," says Hans Redeker, head of currency strategy at Morgan Stanley, in a recent note to clients.

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