A teller counts U.S. dollar bank notes at a money changer in Jakarta, Indonesia, April 9, 2025. Picture taken through glass. REUTERS/Willy Kurniawan

By Ankur Banerjee

SINGAPORE (Reuters) -The U.S. dollar slipped on Thursday as the Sino-U.S. trade war sapped investor sentiment, while growing confidence of the U.S. Federal Reserve cutting its policy interest rate this year also weighed on the greenback.

The euro rose 0.14% to $1.1664 in early trade, hitting a one-week high. The yen also firmed to a one-week high of 150.52 per dollar.

The dollar index, which measures the greenback against six other currencies, was down 0.16% at 98.512, headed for a weekly decline of 0.33%.

Investor focus has been on the trade spat between the world's biggest economies, with U.S. officials blasting China's expansion of rare earth export controls as a threat to global supply chains.

China's commerce ministry defended the controls, pointing to U.S. measures on Chinese goods and companies and calling U.S. criticism hypocritical.

TRUMP-XI MEETING

Amid the tit-for-tat action, U.S. President Donald Trump still expects to meet Chinese President Xi Jinping in South Korea this month, U.S. Treasury Secretary Scott Bessent said.

Vasu Menon, managing director of investment strategy at OCBC, noted the latest trade measures take effect in November after Trump and Xi meet.

"If the meeting goes ahead, some of last week's measures could be toned down or even unwound and presented as successful deliverables."

The sides have maintained lower tariffs and continued rare earth flows under a six-month trade truce that has been repeatedly extended for 90-day periods. Bessent has suggested a longer extension was possible.

"An extension, rather than a grand bargain that settles all trade issues, is probably the most realistic second-best outcome compared to the alternative of escalation of retaliation," said Joseph Capurso, head of foreign exchange at Commonwealth Bank of Australia.

The Australian dollar slipped 0.4% to $0.6485 after data showed unemployment hit a near four-year high in September, adding to the case for interest rate cuts.

The Aussie, often considered a proxy for risk appetite, has been volatile this week due to the trade tension as traditional havens including the Swiss franc gained. The franc was last firmer at 0.7952 per U.S. dollar.

FED CUT WAGERS

With the U.S. government shutdown entering third week, investors have focused on policymakers' comments for a sense of the Fed's near-term path.

Traders have priced in 48 basis points of easing this year, indicating increasing confidence for cuts at the Fed's two remaining policy meetings this year.

U.S. economic activity was little changed and employment largely stable in recent weeks, the Fed said on Wednesday, though there were signs of labour market weakness and a slight pullback in spending.

Meanwhile, attention will also be on Japanese political developments after parliament failed to set a date for its vote on a new prime minister.

The ruling Liberal Democratic Party chose Sanae Takaichi as its chief this month but her path to becoming Japan's first female prime minister has become trickier after the Komeito party chose to end their coalition last week.

The uncertainty could be an overhang for the yen though external factors have aided flows to such havens, analysts said.

"The cost of becoming prime minister is likely to be looser budget settings," CBA's Capurso said. "There is unlikely to be much, if any, political support for policy tightening by the Bank of Japan."

(Reporting by Ankur Banerjee in Singapore; Editing by Christopher Cushing)