Dollar ends strongest year since 2015 on defensive note

© Reuters. Illustration photo of a U.S. Dollar note

By Saqib Iqbal Ahmed

NEW YORK (Reuters) - The dollar fell against the yen and euro in thin year-end trading on Monday as optimism about progress in the U.S.-China trade dispute hurt its safe-haven allure, but the greenback stayed on track to log its strongest annual performance in three years.

The dollar index (DXY), which tracks the greenback versus six peers, was down 0.22 percent on Monday.

"The U.S. dollar is heading into the end of the calendar year on the defensive as global stocks — bearing in mind that some markets are done for the year already — perk up following positive comments on U.S.-China trade from President Trump," Shaun Osborne, chief FX strategist at Scotiabank in Toronto, said in a note.

Equities around the world rose on Monday as hints of progress on the Sino-U.S. trade standoff provided optimism in what has been a punishing end of year for markets globally.

Risk sentiment brightened slightly when U.S. President Donald Trump said he held a "very good call" with China's President Xi Jinping on Saturday to discuss trade and claimed "big progress" was being made.

The two nations have engaged in a trade war for much of 2018, shaking world financial markets as punitive tariffs disrupted the flow of hundreds of billions of dollars worth of goods between the world's two largest economies.

The yen which tends to benefit during geopolitical or financial stress as Japan is the world's biggest creditor nation, remained in demand and the greenback hit a fresh six-month low against the Japanese currency .

"We've heard this all before and are still awaiting concrete details, of course," said Osborne.

The persistent tensions have boosted safe-haven demand for the greenback this year as investors bet that the United States is in better shape than its rivals to weather a trade war.

For the year, the index was up 4.4 percent, its best yearly percentage gain since 2015.

While the dollar has been relatively stable going into the end of 2018, expensive valuation, a flagging equity boom, waning cash repatriation by U.S. companies, and the possibility that the U.S. Federal Reserve will not raise interest rates as many times as previously signaled pose a challenge for the greenback.

"We still rather think the U.S. dollar may be peaking after spending much of the past year on the offense," said Osborne.

On Monday, the euro (EUR=) EBS was 0.08 percent higher against the greenback. Although the single currency has gained versus the dollar in recent weeks, economic growth and inflation in Europe remain much weaker than the European Central Bank's expectations.

The euro is set to lose nearly 5 percent versus the dollar in 2018.

Sterling, which has been battered this year by Brexit woes, rose 0.31 percent to a three-week high . The British pound has lost about 6 percent of its value versus the dollar this year.