Dollar Relief as Trump, China Ease Trade War Tensions

Dollar to see limited damage from renewed China-U.S. trade fears.

The dollar is better supported on Monday on signs that both China and the U.S. appear ready to negotiate away renewed trade tensions.

The firmer tone follows Friday's sudden selloff, caused by U.S. President Donald Trump's threat to raise tariffs on Chinese imports by 100% and restrict certain key exports. Trump's move followed the announcement of new Chinese export curbs on key rare earth exports.

The developments were clearly unexpected, with stocks tumbling in value in response. The dollar's fall meanwhile confirmed it to be highlighy sensitive to higher U.S. import tariffs.

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However, U.S. President Donald Trump over the weekend offered his Chinese counterpart Xi Jinping an offramp.

"Don't worry about China, it will all be fine! Highly respected President Xi just had a bad moment. He doesn't want Depression for his country, and neither do I. The USA wants to help China, not hurt it!!!" Trump wrote on Truth Social.

"Comments received over the weekend appear to downplay the risk of trade war escalation," says Antti Ilvonen, Senior Analyst at Danske Bank.

The dollar index - a broad measure of dollar performance - dropped 0.55% on Friday to reach 98,92, where we find it on Monday.

GBP/USD recovered 0.40% on Friday to 1.3349, and added to that gain to go to 1.3356 on Monday. EUR/USD recovered 0.50% to 1.1620, where it trades at the time of writing.

The risk for the dollar was that weekend news on the flare-up was not good, entrenching positions on both sides.

However, to the greenback's relief, both sides are playing down the prospect of a bad outcome and analysts say a deal will be reached.

China's commerce ministry on Sunday urged further negotiations to resolve outstanding trade issues.

"It’s going to be a delicate dance," said U.S. Vice President JD Vance on Sunday, in a media interview.

"The change in tone suggests to us that there has been backchannel communication between the U.S. and Chinese side over the weekend that point to a deal being possible at the end of the month and that the tariffs will not go into effect," says Ilvonen.

U.S. futures jumped in early Asia trading Monday after the Sunday comments.

The source of the trouble started with China announcing new export controls on rare earths, the production of which it dominates.

In response, Trump announced Friday that he would add tariffs of 100% on Chinese goods and restrict certain U.S. software exports, beginning November 01, while also signalling he might halt shipments of aircraft parts.

"I think that is a normal reaction for the markets to have some concern," U.S. Trade Representative Jamieson Greer said in a media interview Sunday. "That being said, these measures aren’t in place yet. It's scheduled for Nov. 1. So I think we’ll see the markets calm this coming week, as they see things settle out."

Focus now turns to a Xi-Trump meeting at the end of the month, where the two sides can dial back the escalation.