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FOREX-Dollar hits 4-month low, yuan recovers as Sino-U.S. tensions simmer

(Updates throughout, adds fresh analyst comments)

* Dollar index hits fresh 4-month low

* Yuan recovers to trade around 7 per dollar

* Euro holds firmly below $1.16

* Graphic: World FX rates in 2020

LONDON, July 23 (Reuters) - The U.S. 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 7 per dollar mark.

Viraj Patel, FX and global macro strategist at Arkera, said the main upcoming event will be U.S. Secretary of State Mike Pompeo’s speech on China later on Thursday, provided it goes ahead, as U.S.-China tensions are the dominant narrative for dollar trade this month.

“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 7 handle,” he said.

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

The index that measures the dollar against peer currencies hit its lowest since March 9. The dollar index has lost nearly 8% since its March 20 peak, when a global dollar funding crunch saw a surge in demand. It is down 1.5% year-to-date.

U.S.-China ties have deteriorated this year over issues ranging from the new coronavirus and telecoms-gear maker 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 U.S.-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 dollar was flat at 107.15.

The euro was at $1.1581, just below a 21-month high of $1.1601 hit earlier this week after Europe’s leaders agreed a recovery fund.

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

Reporting by Ritvik Carvalho; additional reporting by Tom Westbrook in Singapore and Barbara Lewis