Safe haven dollar firms on global slowdown fears, trade tensions

By Vatsal Srivastava

SINGAPORE (Reuters) - The dollar traded firm against major peers on Wednesday, extending overnight gains as investors shunned riskier assets in favor of safe haven currencies on escalating worries about slowing global growth and the U.S.-Sino trade war.

With sentiment souring and a global equities rout on Tuesday, risk averse traders sought shelter in the liquid dollar, which climbed from a two-week low hit earlier on Tuesday.

"What's driving currency markets right now are fears of a slowdown in economic growth with safe haven currencies like the dollar and yen likely to benefit," said Michael McCarthy, chief markets strategist at CMC Markets.

The greenback had been under pressure for most of this week as cautious comments by Federal Reserve officials and surprisingly weak U.S. economic data suggested the central bank could slow the pace of monetary policy tightening.

The dollar index (DXY), measuring performance against six major peers, was steady at 96.82 on Wednesday. The index gained 0.65 percent in the previous trading session.

"For now, the dollar has retained its safe haven attributes outperforming across the board in the overnight session," said Rodrigo Catril, senior currency strategist at NAB, in a note.

With the Federal Reserve widely expected to raise interest rates by 25 basis points in December, analysts think the greenback could trade with a positive bias in the short term, despite lowering their longer-term rate hike expectations.

The yen traded at 112.91, with the greenback gaining 0.14 percent. The yen hit its highest level this month on Tuesday at 112.29 per dollar before losing steam as dollar bulls took charge.

Despite its safe haven status, the yen's strength has been muted. Analysts suspect this is because Japanese investors have kept their money in U.S. and foreign markets, rather than bring it home.

The euro (EUR=) traded with a weak bias at $1.1372. The single currency lost 0.7 percent of its value on Tuesday.

Wider confidence retreated on Tuesday as Italian bank shares hit a two-year low and the spread between German and Italian bond yields widened.

Italy is at loggerheads with the European Commission and many fellow euro zone governments over its expansionary 2019 budget, which breaks EU's fiscal rules.

"The potential for the a further tussle between Rome and Brussels can have an impact on the overall Eurozone economic growth, which will keep the euro under pressure," added Michael McCarthy.

The British pound was little changed at $1.2786, having lost 0.5 percent versus the greenback on Tuesday. The pound is seen likely to trade sideways until the market gets more clarity on progress in the Brexit deal.

The Canadian dollar dropped to a four-month low versus the dollar to trade at 1.3305 as the price of crude <.CLc1> fell to its lowest level in more than a year ahead of next month's OPEC meeting. Canada is one of the world's top oil exporters.

Elsewhere, the Australian dollar , often considered a barometer of risk appetite, staged a slight recovery along with U.S. equity futures, gaining 0.2 percent to trade at $0.7230. The Aussie dollar lost more than 1 percent on Tuesday as global risk sentiment worsened.