Asia shares cheered by trade hopes, dollar downcast

Sydney (Reuters): Asian share markets rallied on Tuesday as reports of behind-the-scenes talks between the United States and China rekindled hopes a damaging trade war could be averted, in turn sapping the strength of the dollar and yen.

Taking its cue from a surge on Wall Street, Japan’s Nikkei .N225 climbed 1.1% in early trade.

MSCI’s broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS firmed 0.4%. South Korea’s KOSPI .KS11 rose 0.7%, adding to gains made after the US exempted the country’s steel from import tariffs.

The abrupt mood swing came amid reports Chinese and US officials were busy negotiating to avert an all-out trade war.

White House officials are asking China to cut tariffs on imported cars, allow foreign majority ownership of financial services firms and buy more US-made semiconductors, said a person familiar with the discussions.

Chinese Premier Li Keqiang on Monday pledged to maintain trade negotiations and ease access to American businesses.

Even a whiff of a compromise was enough to propel Wall Street to its best day in 2-1/2 years and deliver the Dow its third-biggest point gain ever.

The Dow .DJI jumped 2.84%, while the S&P 500 .SPX climbed 2.72% and the Nasdaq .IXIC 3.26%. All 11 major sectors of the S&P 500 gained, with technology .SPLRCT up 4.0% and finance .SPSY 3.2%.

The sudden bout of optimism on trade helped offset news the United States and many of its allies were expelling more than 100 Russian diplomats in retaliation for a nerve agent attack on a former Russian spy in Britain.

The surge in stocks weighed on the Treasury market, which faces a record $294 billion of new supply this week.

Yields on 10-year Treasury notes US10YT=RR inched up to 2.856% but remained short of last week’s top above 2.90%.

In currency markets, the reaction was to offload both the yen and the US dollar.

“The yen is being quietly sold as risk hedges are unwound and looks particularly vulnerable on the crosses,” Citi analysts said in a note.

Short-covering against the euro was especially sharp as the common currency jumped 1.4% overnight EURJPY= to stand at 131.32 yen.

That allowed the US dollar to bounce a little to 105.51 yen JPY=, having been at its lowest since late 2016 at one point. Yet the US currency ran into selling against almost everything else, with notable breaks by the euro and sterling.

The euro was up at $1.2453 EUR=, after cracking the March top at $1.2446 and bulls were eyeing the peak for the year so far at $1.2556.

The broad-based weakness saw the dollar drop to a five-week trough on a basket of currencies at 88.979 .DXY.

The decline offered some support to commodities priced in the dollar and spot gold XAU= edged up to $1,353.60 an ounce.

In oil markets, US crude futures CLc1 put on 8 cents to $65.63 a barrel, while Brent crude LCOc1 added 6 cents to $70.16 a barrel.

Last week, Brent gained 6.4% and WTI rose 5.7% for the strongest gains since July.