The US dollar edged higher against the safe-haven yen on Tuesday as investors’ appetite for riskier assets reawakens, following the establishment of the bilateral trade deal between the US and Mexico.
The US dollar index, which tracks the greenback’s strength against a basket of six major currencies, was down 0.1 percent to $94.57.
The dollar has lost over 2 percent since reaching a high not seen in a year on August 15 as US President Donald Trump stated that he was not thrilled with the Federal Reserve’s decision to hike rates at a time when the US government was in the process of stimulating the economy.
As the US and Mexico find common ground on key trade terms, optimism for a softening global trade tensions helped bolster the yen by 0.1 percent to 111.07 per dollar.
Currency and equity strategist Shusuke Yamada said the de-escalation of trade tensions tends to be negative for the yen, while supporting cross-yen trades, adding that cross-yen pairs like the EUR/JPY have been a function of risk assets.
The US-Mexico trade agreement also resulted to the Mexican peso rising 0. percent on Monday after initially climbing 1.2 percent. The currency was up 0.02 percent to 18.7685 per dollar on Tuesday.
Against the Canadian dollar, the greenback fell 0.1 percent to 1.2942, while it slipped 0.3 percent to 0.9764 against the Swiss franc.
US and Mexico Seals Agreement to Revise NAFTA
The US and Mexico sealed a trade deal on Monday that is intended to revise the North American Free Trade Agreement (NAFTA), the existing pact between the two countries and Canada.
The agreement puts pressure on Canada to accept new policies on auto trade and dispute settlement rules to remain as part of the three-nation treaty, which could stir up economic uncertainty caused by Trump’s repeated threats to abandon the 1994 treaty.
Still, market strategist Ayako Sera said the US-Mexico deal slightly helped mitigate concerns over the escalating global trade tensions for the time being.
It is not the case that the trade problems between Mexico and the US have been completely solved. Going forward, Canada will become involved, so there are still parts that hard to predict, according to Sera.
She added that the China-US trade problems remain so far unsolved and it is still unclear what Canada will do in relation to the deal.
Trump already stated that he could impose tariffs on Canadian vehicles if the country did not consent to the new agreement and also wants concessions on Canada’s dairy products.
In the preliminary agreement, the US and Mexico settled on rules that will require 75 percent of a product must be made in the two nations to receive a tax-free treatment, which is more than the current deal.
As regards to automobiles, they have agreed that 40 to 45 percent of each car needs to be built by employees earning at least $16 per hour. The policy is meant to prevent companies from seeking production plants in lower-wage Mexico.
US Trade Representative Robert Lighthizer stated that the new deal will last for 16 years and be reviewed every 6 years. The accord will not cut imports of light vehicles from Mexico, although the steel and aluminum tariffs already in place will remain.