By Tomo Uetake
SYDNEY (Reuters) – The dollar held near a 2-1/2-month high against the yen on Monday on signs of progress in U.S.-China trade talks, while sterling’s rally ran out of steam after touching a 3-month peak on hopes for an orderly British exit from the European Union.
On Friday, the dollar strengthened against the safe-haven yen to as high as 108.63 yen <JPY=>, its highest since August 1, before U.S. President Donald Trump said the United States and China had reached a ‘Phase 1’ trade deal.
It pared those gains after Trump announced the agreement, covering agriculture, currency and some aspects of intellectual property protections.
In Asian trade on Monday, the dollar inched down to 108.34 yen, while the euro stood at $1.1034 <EUR=> versus the greenback, off Friday’s three-week high of $1.10625.
With Tokyo’s market closed for a public holiday and the United States also seeing partial market closures for Columbus Day, trading volumes would likely remain lighter than usual.
Analysts said the further gains in the dollar/yen may be limited because the partial deal between the world’s two largest economies appeared to lack substance with limited progress on structural issues such as technology transfers.
The trade deal “looks more symbolic than substantial, and might be better described as simply an ‘interim trade war truce,’” said Ray Attrill, head of FX strategy at National Australia Bank.
“This Phase 1 agreement, if inked, does little to immediately brighten the outlook for global trade and growth. While it shouldn’t prevent the Fed from agreeing to cut rates by another quarter point on Oct. 30, it doesn’t provide a firm pretext for significant or sustained U.S. dollar depreciation.”
The deal represents the biggest step between the United States and China in a 15-month trade dispute. Friday’s announcement did not include many details and Trump said it could take up to five weeks to get a pact written. He acknowledged the agreement could fall apart during that period, though he expressed confidence that it would not.
The British pound surged on Friday to as high as $1.2708 <GBP=D4>, its strongest since July 1, and a five-month peak of 86.955 pence per euro <EURGBP=D4>, on optimism about orderly Brexit.
On Monday, cable’s rally ran out of steam and was last traded at $1.2610 <GBP=> in Asia, 0.28% lower on the day.
The EU agreed on Friday to hold another round of intense negotiations with London in a bid to break the deadlock and secure a deal before the Oct. 31 deadline.
EU negotiator Michel Barnier and his British counterpart Stephen Barclay earlier held what both sides called a “constructive” meeting in Brussels. The British and Irish prime ministers said on Thursday they had found “a pathway” to a possible deal, and by Friday some officials were expressing guarded optimism.
On Sunday, British Prime Minister Boris Johnson told his cabinet a last-minute deal was still possible as the two sides pressed on with intensive talks to try to avoid a disorderly Brexit on Oct. 31.
Britain said there would be more talks on Monday, with Johnson hoping a deal will be agreed in time for EU leaders to approve it at a summit in Brussels on Thursday and Friday this week.
But he will still have to convince a deeply divided British parliament to ratify the agreement, while the European Commission said “a lot of work remains to be done” in a statement issued late on Sunday.
“Brexit talks between the UK and the EU will continue today. With the EU Council meeting to take place on Oct. 17-18, Brexit headlines will be the main focus for this week,” said Daria Parkhomenko, FX strategist at RBC Capital Markets.
(Editing by Neil Fullick and Jacqueline Wong)