Dollar sends yuan, Aussie lower on fears of U.S. tariff threats

By Tommy Wilkes

LONDON (Reuters) - The dollar strengthened on Wednesday, sending the Chinese yuan towards recent lows and pressuring the Australian dollar on fears of an imminent escalation in the trade dispute between the United States and China.

A source familiar with the matter said the Trump administration plans to propose a 25 percent tariff on $200 billion in Chinese imports, up from an original 10 percent, in a bid to pressure Beijing into making trade concessions.

With a possible escalation in the months-long dispute and fears about what it would mean for the Chinese and then the global economy, investors bought into the dollar and sold currencies linked to China’s economic fortunes.

The greenback rose 0.2 percent against a basket of currencies before pulling back, while against the offshore yuan gained more than half a percent to as high as 6.8458 yuan, not far from the recent peak of 6.8562.

The news came as a survey showed China’s factory sector grew at the slowest pace in eight months in July as export orders declined yet again.

The yuan has now fallen for four months in a row and China’s central bank on Wednesday set the currency at its weakest since May last year.

The Aussie dollar, seen as a proxy for Chinese growth because of Australia’s big export sectors, slipped 0.3 percent while a sidelined euro was down 0.1 percent at $1.1682.

Still, analysts said the reaction of currency markets was limited, in part because Trump’s latest batch of proposed tariffs were expected and in part because the trade tensions are yet to have an impact on economic data.

“The [currency] markets have calmed down relatively quickly Maybe the market is underestimating the economic impact of the tariffs and that is why it is keeping calm,” said Thu Lan Nguyen, an FX strategist at Commerzbank in Frankfurt.

This week also sees a number of central banks meeting, with the U.S. Federal Reserve due to conclude its policy meeting later in the day and the Bank of England holding its event on policy meeting on Thursday.

The Bank of Japan held its meeting on Tuesday.

Against the yen the dollar rose 0.2 percent to 112.10 as Tuesday’s pledge by the BoJ to keep rates extremely low for an extended period continued to weigh on the Japanese currency.

“Relative to other major central banks, the BoJ is now decisively the last cab off the easy policy rank,” said Ray Attrill, head of FX strategy at National Australia Bank.

“Higher inflation remains the BoJ’s main priority and therefore we suspect the Bank will be at pains to make sure its actions don’t result in a stronger yen.”

The BoJ’s reluctance to tighten policy stands in contrast to the U.S., where the Fed is raising rates as solid economic growth puts upward pressure on inflation.

Data out Tuesday showed U.S. consumer spending increased solidly in June even as wage growth stayed restrained. The core PCE index, the Fed’s preferred inflation measure, rose 1.9 percent from a year earlier for a third straight month, near the Fed’s two-percent inflation target.

Additional reporting by Wayne Cole in SYDNEY; Editing by Raissa Kasolowsky