Investing.com - The dollar fell sharply against its rivals Monday on fading fears over the prospect of a global trade war after the United States and Mexico reached a bilateral deal on NAFTA, paving the way for Canada to rejoin talks.
The U.S. dollar index, which measures the greenback against a trade-weighted basket of six major currencies, fell by 0.47% to 94.63.
President Donald Trump on Monday announced his administration had reached a deal with Mexico on issues that have upended the renegotiation of the North American Free Trade Agreement (NAFTA), the current trade agreement among the U.S., Canada and Mexico, for over a year.
Trump suggested the United States-Mexico Trade Agreement would replace NAFTA, paving the way for Canada to rejoin talks, bringing Trump a step closer to overhauling NAFTA and reducing investor fears over a full-blown trade war.
Trump reportedly warned, however, that if a deal with Canada failed to materialized, then the U.S. would move ahead with tariffs on imported goods from Canada. This would dent the loonie as it throws into doubt expectations about a September rate hike, analysts said.
"By saying Canada could be left out, the US is threatening to take a tough line in those talks," CIBC said in a note to clients. "The scenario poses uncertainty for Canadian economy, and could prompt Bank of Canada to hold off on a rate rise early next month."
USD/MXN fell 1.12% to 18.71, USD/CAD fell 0.51% to C$1.2961.
Fears over a full-blown trade war had kept demand for the greenback elevated on expectations that the strong U.S. economy would be less troubled from a trade war than that of its rivals.
The dollar's poor start the week comes as analysts warned that investor conviction for the greenback was starting to wane.
Investors' conviction in the strength of the dollar is starting to wane, said TD Securities, citing the recent stream of news flow, including U.S. Federal Reserve Chairman Jerome Powell's comments at Jackson Hole and recent developments in Washington.
The plunge in the dollar was further compounded by strength in both euro and pound.
EUR/USD rose 0.52% to $1.1684 following better-than-expected business confidence in Germany, the eurozone’s largest economy.
GBP/USD gained 0.31% to $1.2889, although gains in the pair were kept in checked by fears of a no-Brexit deal, which would see the U.K. crash out of the European Union without a trade deal with the member bloc and would likely hurt the U.K. economy.
"It is hard to be positive on sterling or bond yields, especially since we seem to be past the peak in inflation and the effect of Brexit uncertainty on business investment remains unclear," said Adrian Hilton, head of global rates and currency investments and fixed income at Columbia Threadneedle Investments.
Easing fears over a global trade war helped the dollar pare some losses against safe-haven yen.
USD/JPY fell 0.19% to Y111.06. The pair traded as low as Y110.52 intraday.