Greenback hits 4-month low on Sino-US tensions

London

THE US dollar hit four-month lows against a basket of peer currencies on Thursday and China's yuan partially recovered losses from an earlier slide, as investors took a wait-and-see approach to tensions between the two countries.

The United States gave China until Friday to close its consulate in Houston following allegations of spying.

China has vowed to respond, and the escalating tension between the world's two largest economies sent the yuan on its sharpest slide in nearly two months on Wednesday.

That slide reversed on Thursday, with the offshore yuan bouncing back to trade around the seven per US dollar mark.

Viraj Patel, FX and global macro strategist at Arkera, said the main upcoming event will be US Secretary of State Michael Pompeo's speech on China later on Thursday - provided it takes place as planned - as US-China tensions are the dominant narrative for greenback trade this month.

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"Investors will likely equate further action (not just rhetoric) to an escalation in tensions and that could dent risk appetite more broadly if dollar/yuan moves back above the seven handle," he said.

UBS forecast the yuan - a barometer of Sino-US relations - would reach 6.8 per US dollar by the end of 2020, and 6.7 by the first half of 2021.

The index that measures the greenback against peer currencies hit its lowest since March 9.

The US dollar index has lost nearly 8 per cent since its March 20 peak, when a global dollar funding crunch saw a surge in demand. It is down

1.5 per cent year-to-date.

US-China ties have deteriorated this year over issues ranging from the novel coronavirus and telecommunications giant Huawei, to China's territorial claims in the South China Sea and Hong Kong crackdown.

"From an FX perspective, we see signs of fragility offering a floor to USD for now, although a material escalation in US-China tensions will be required to trigger a true USD rebound, which still retains its medium-term bearish arguments, in our view," said strategists at ING in a note to clients. Against the safe-haven Japanese yen, the US dollar was flat at 107.15. The euro was at US$1.1581, just below the 21-month high of US$1.1601 hit earlier this week after Europe's leaders agreed on a recovery fund.

The Australian dollar retreated from a 15-month peak to around US$0.7128, while the New Zealand dollar was just below Wednesday's six-month top of US$0.6678. REUTERS