Dollar drops as U.S.-EU agree to reduce tariffs

By James Thorne

New York (Reuters) - The U.S. dollar weakened against the euro on Wednesday after the United States and the European Union agreed to deescalate a transatlantic trade conflict, leaders from the two trading partners announced in a joint statement in Washington.

The dollar had strengthened in the past six months in part due to deteriorating global trade relations. Rising U.S. interest rates have also propped up demand for the greenback.

"Everybody's trying to figure out if (U.S. President Donald Trump) is making deals or not," said Axel Merk, president of the Merk Hard Currency Fund in Palo Alto, California.

The euro rose to $1.1728 following the report, up 0.4 percent. Against a basket of six major currencies <.DXY>, which is heavily weighted toward the euro, the dollar fell 0.44 percent during the session.

The trading partners agreed to hold off on further tariffs while negotiations were taking place. Trump and European Commission President Jean-Claude Juncker said they were also working to eliminate tariffs and subsidies on non-auto industrial goods.

The dollar fell 0.2 percent to 110.97 yen on Wednesday. The Japanese currency found some support early this week on expectations the Bank of Japan might be a step closer to scaling back some of its aggressive monetary stimulus.

The Canadian dollar reached its highest level against the U.S. dollar in six weeks after Canadian and Mexican policymakers said they were optimistic about a deal on NAFTA. The loonie was 0.8 percent higher at 1.3044 Canadian dollars to the greenback.

The offshore yuan strengthened 0.8 percent against the dollar to 6.753 yuan as traders took profits after the Chinese currency hit its weakest level since June 2017 on Tuesday.

Sterling rose 0.3 percent to $1.3187 on increased odds for an August rate hike and easing U.S.-EU trade tensions.

(Reporting by James Thorne; Editing by Richard Chang)

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