FOREX-Euro dips as Russia says won't annex other parts of Ukraine

Tue Mar 18, 2014 11:09am EDT

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* Yen benefits broadly, helped by Ukraine worries

By Daniel Bases

NEW YORK, March 18 (Reuters) - A modest easing of geopolitical tension in Ukraine and a slight increase in U.S. Treasury yields took some premium away from the euro on Tuesday, sending it down against the U.S. dollar and the yen.

The Chinese yuan deepened its month of losses against the greenback on more signs of problems with a slowing economy and a heavily indebted corporate sector. The yuan's weakness was seen as a benefit for the yen, helping lift it against the greenback.

Market strategists pointed to comments by Russian President Vladimir Putin that he did not plan to seize other regions of Ukraine as a signal the crisis may not deepen. Putin signed a treaty on Tuesday making Crimea part of Russia, defying Ukrainian protests and Western sanctions.

"Right now I am more inclined to treat this as intra-day noise," said Marc Chandler, chief global currency strategist at Brown Brothers Harriman in New York. "As much as I do think geopolitics should be a bigger euro negative and bigger negative on Europe as exposures to Russia and Ukraine are much bigger, I don't think the market is focusing on that. I think the market is focusing on the lack of escalation in the tensions."

"I think the Crimea was a foregone conclusion and we have known that at least since the weekend. But I think the sanctions now are more rigorous or harder now than the sanctions that were put on Russia after they went into Georgia in 2008," Chandler said.

The euro dipped 0.11 percent to $1.3904, having briefly broken down to $1.3891, but it essentially remained in a narrow trading range with a high on the day of $1.3941.

The crisis in Ukraine led to a sharp drop in Germany's ZEW survey of investor and analyst sentiment, contributing to early losses for the euro.

The dollar fell to 101.51 yen, a loss of 0.25 percent against the Japanese currency.

There was little impact on markets from U.S. consumer inflation data, which showed a slight rise of 0.1 percent, a muted increase despite rising food prices.

"We see a significant risk off which is fading, linked to Ukraine, then we still have the worry of China, but it is not leading to contagion. It is receding," said Sebastian Galy, senior currency strategist at Societe Generale in New York.

YUAN DROP

Reversing one of the past decade's few sure bets in the foreign exchange market, the Chinese yuan is down around 2.5 percent in the past month. That move has resumed since officials widened the trading band for the currency over the weekend.

A survey of 970 global investors by Barclays showed that China's problems have replaced the U.S. Federal Reserve's reining in of monetary policy as the biggest concern for market players since the start of 2014.

"I've squared up now but I think there's a risk that the yuan could go to 6.30-6.40 per dollar," said Graham Davidson, a foreign exchange trader at Australian bank NAB in London.

"The yen will tend to gain against the dollar as the yuan weakens."

The yuan weakened to 6.1795 to the dollar versus Monday's close around 6.1580.

There are differing schools of thought on the fallout for Japan of a weaker yuan. On the one hand it allows Japan's big manufacturers to invest more cheaply in producing cars and electronics in China, while the competitive advantage of those factories also grows. Profits can then flow back into Japan.

On the other hand, a generally weaker Chinese economy poses problems for Japan given China's importance as a market for Japanese products and investment.

Dealers say that many of those who were betting strongly at the start of this year on further gains for the yuan are still to be shaken out, and that the currency could go much lower.

The main barrier to that is the People's Bank of China itself, which has kept its reference rate for the yuan around 6.13 for a week, encouraging speculation it may defend the top end of its newly widened 2 percent band around 6.25 per dollar.

"If the top of the band is 6.25-6.27 they are not showing any great signs of wanting to let that go," Davidson said.

The yuan - which is not fully convertible internationally and trades in a complicated system of "offshore" and Chinese "onshore" rates - was 0.5 percent lower against its Japanese counterpart at 16.4331.

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