Dollar gains, yuan hits 9-month low as US-China tensions return

The US dollar edged higher on Wednesday and China's yuan hit a near nine-month low as worries about the US response to China's proposed security law for Hong Kong injected a more cautious tone into foreign exchange markets.

The US currency had fallen sharply on Tuesday as strong risk appetite encouraged investors into riskier currencies, but that sentiment was much less buoyant in early trading on Tuesday.

Some investors are betting on a rapid resumption of economic activity following the crippling coronavirus outbreak, but others worry the threat of US sanctions against China for its treatment of Hong Kong could easily worsen risk sentiment again.

Renewed protests in Hong Kong added to the nervous mood.

“Yesterday's risk-on rally is already running out of steam. That seems quite right, but not just because of the tensions between the US and China,” said currencies analyst Thu Lan Nguyen at Commerzbank.

Nguyen said the economic outlook remained uncertain even as countries reopen their economies, not least in predicting how consumers would behave once they can shop and travel more freely.

The dollar, measured against a basket of currencies, rose 0.1 per cent to 99.146.

The euro, which rose sharply on Tuesday, fell 0.2 per cent to $1.0961, as investors waited for the European Commission to release details of a financial rescue fund for the bloc.

The European Commission is to present its own proposal for a coronavirus recovery fund later on Wednesday after a Franco-German proposal for a 500 billion euro ($547.70 billion) fund ran into opposition.

But it was the offshore yuan that saw the most striking move. It fell to its lowest against the dollar since September of last year when the US-China trade dispute was at its most intense.

The dollar gained 0.4 per cent at 7.1766 yuan, not far from the offshore yuan's record low of 7.1975 touched in early September.

Should the onshore yuan fall below September's lows it would be at its weakest since 2008.

US President Donald Trump said on Tuesday the US would announce before the end of the week its response to China's planned security bill for Hong Kong.

“We are in a broad risk-on trend, but the only thing that can change this is the US-China relationship,” said Junichi Ishikawa, senior foreign exchange strategist at IG Securities in Tokyo.

“More problems between these two countries would slow the dollar's recent decline and potentially lead to dollar buying as a safe haven.”

The dollar slipped marginally against Japan's currency, last trading down 0.1 per cent at 107.49 yen.

Sterling and commodity-linked currencies such as the Australian dollar fell after Tuesday's jump as investors turned more cautious. ($1 = 0.9129 euros)

COMMENT NOW