FOREX-Dollar softens as US-China talks take spotlight

By Gertrude Chavez-Dreyfuss

NEW YORK, June 9 (Reuters) - The U.S. dollar weakened against most major currencies on Monday, moving in narrow ranges, as market participants consolidated gains racked up following Friday's better-than-expected U.S. employment report and shifted their focus to pivotal U.S.-China trade talks in London.

The meeting of top officials from both countries intends to address disagreements around a preliminary pact struck last month in Geneva, briefly cooling tensions between the world's two largest economies. Negotiations could last up to two days.

The talks come at a crucial time for both sides, with China grappling with deflation and trade uncertainty dampening sentiment among U.S. businesses and consumers, prompting investors to reassess the dollar's safe-haven status.

Customs data showed China's export growth slowed to a three-month low in May as U.S. tariffs slammed shipments, while factory-gate deflation saw its worst level in two years. China's exports to the U.S. plunged 34.5% year-on-year in May value terms, the sharpest drop since February 2020, when the outbreak of the COVID-19 pandemic upended global trade.

In afternoon trading, the dollar was down about 0.2% against the Japanese currency JPY=EBS at 144.55 yen after two consecutive weeks of gains.

Japan is considering buying back some super-long government bonds issued in the past at low interest rates, two sources with direct knowledge of the plan said on Monday, underscoring its focus on reining in any abrupt rises in bond yields.

"The dollar is retreating and momentum is fading...putting downward pressure on trading ranges and measures of implied volatility," said Karl Schamotta, chief market strategist, at Corpay in Toronto.

"Investors believe that positive headlines emanating from the U.S.-China trade talks are largely priced in across the major currency pairs, Wednesday's inflation numbers are expected to come in soft, and even Thursday's 30-year Treasury auction is seen meeting with solid investor demand."

The euro EUR=EBS, meanwhile, rose 0.3% versus the greenback to $1.1427, as markets continued to price in the European Central Bank's monetary policy outlook issued last week, which indicated it may be close to ending its easing cycle.

Sterling also gained versus the greenback, adding 0.3% to $1.362.

"The situation is looking more like (in) the second half of the year, the Fed will need to get dovish and help the financial environment," said Juan Perez, director of trading at Monex USA in Washington.

"Ultimately, if the U.S. is going to be struggling, there is no clear reason to have any long-term faith in the dollar."

The dollar index, a gauge of the greenback's value against six major currencies, dipped 0.2% to 98.942 =USD.

Elsewhere, China's offshore yuan CNH= was last at 7.18 per dollar, little changed on the day.

New Zealand's dollar NZD=D3 rose 0.6% to US$0.6054, while the Australian dollar AUD=D3 was last up 0.4% at US$0.6522 in light volumes.

Also on the trade front was a report that said Japan's chief trade negotiator Ryosei Akazawa is planning a sixth round of talks in Washington.

Later in the week, an inflation report out of the U.S. for May will be the focus, as investors and Federal Reserve policymakers look for the impact of trade restrictive policies on the economy.

"With the labor market looking resilient but not overheated, it should help keep services inflation within a reasonable range," wrote BeiChen Lin, senior investment strategist at Russell Investments in emailed comments.

"For now, medium-term inflation expectations still look well-anchored. So even if there is a near-term boost to prices from trade policy, as long as the Fed believes these effects to be non-persistent, we could still see rate cuts this year."

Fed officials have signalled that they are in no rush to cut interest rates and signs of economic resilience will likely cement their stance.

Interest rate futures showed that investors are anticipating that the U.S. central bank may cut borrowing costs by 25 basis points (bps) later this year, with the earliest likely in October, according to data compiled by LSEG calculations 0#USDIRPR. Rate futures have priced in just 47 bps of cuts in 2025.