Dollar rises as trade tensions attract safe-haven bids

By Gertrude Chavez-Dreyfuss

NEW YORK (Reuters) - The dollar started the third quarter on a positive note on Monday, benefiting from mounting global trade tensions and political developments in Europe, as investors scooped up the greenback as a safe-haven bet.

Tension is growing ahead of a July 6 deadline when Washington is due to impose $34 billion of tariffs on Chinese exports, with two surveys of Chinese manufacturing out in the last few days showing a softening in activity, partly due to softness in exports.

"The dollar seems to have benefited from safe-haven flows ... as trade tensions and political developments in Europe have reduced investors' appetite for risk," said Oliver Jones, market economist at Capital Economics in London.

Meanwhile, German Chancellor Angela Merkel was dealt a fresh blow when her interior minister offered to quit in an escalating row over migration policy, pushing the euro lower.

Late on Monday, Merkel said a compromise had been reached between the Christian Social Union (CSU) and her Christian Democrats (CDU) on the migration issue, which essentially would secure the principle of freedom of movement within the EU while allowing Germany to take "national measures" to limit migrant arrivals.

The euro cut losses against the dollar after the news, and was last at $1.1637.

But Jones noted that even if global and trade worries ease, the dollar will remain supported.

"Given the outlook for U.S. monetary policy, we think that the currency will be supported by another pick-up in Treasury yields this year should a full-blown trade war be avoided," Jones said.

Taking note of the rising dollar, BNP Paribas trimmed its end-2018 forecasts for the euro and sterling.

In afternoon trading, the dollar index was up 0.4 percent at 95.048 <.DXY>

The dollar extended gains after the Institute for Supply Management's manufacturing index showed a reading of 60.2, higher than the market forecast of 60.2, while U.S. construction spending rose 0.4 percent in May.

Latest positioning data remains broadly dollar-supportive and is an extension of themes seen in currency markets in recent days.

Dollar longs edged higher for a second consecutive week, euro longs got trimmed again with net outstanding long positions at their lowest in nearly two months while the Swiss franc enjoyed some safe-haven support.

A rising dollar also translates into tightening financial conditions for broader financial markets given the U.S. currency's dominance in global financing and trading markets.

The dollar extended gains against the Japanese currency to a new six-week high of 111.06 yen , pressured by the Bank of Japan's tankan business sentiment survey, which showed a slight dip in big Japanese manufacturers' sentiment.

(Reporting by Gertrude Chavez-Dreyfuss in New York; Editing by Susan Thomas and Richard Chang)

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