* U.S. escalates trade conflict with new tariff plan
* Euro weakens to five-week low as dollar gains
* Yuan at more than 14-month low
* Sterling frail on Brexit fear after BoE rate hike
* Graphic: World FX rates in 2018 tmsnrt.rs/2egbfVh
By Tom Finn
LONDON, Aug 3 (Reuters) - The yuan rocketed and the U.S. dollar fell sharply across the board on Friday after the Chinese central bank raised the forward reserve requirement for foreign exchange and said it would seek to keep its currency basically stable.
China’s offshore yuan had slumped to a 14-month low earlier this week as investors sold the currency and rushed into dollars on worries the trade conflict between Washington and Beijing would damage the Chinese economy.
“Its all about the dollar-yuan. That move there has been driving action across currency markets and pulling the dollar down broadly,” said Valentin Marinov, Head of G10 FX Strategy at Credit Agricole.
“This move [by the central bank] makes it more difficult to bet against the yuan but the chances are we won’t see a trend reversal in the dollar. The trade war, and the threat to China’s economy, is the more dominate driver in the market.”
China’s central bank said it would set a reserve requirement ratio of 20 percent - from an earlier zero - from Monday for financial institutions settling foreign exchange forward yuan positions.
The Chinese currency has tumbled almost 10 percent since early April in offshore markets, and investors have speculated that its weakness would be encouraged by the People’s Bank of China to counter the impact of U.S. tariffs on its exports.
The offshore yuan reversed losses on Friday and rose as much as 0.8 percent to 6.827, back to where it traded on Thursday.
The U.S. dollar index gave up gains and slipped 0.1 percent against a basket of currencies to 95.112. The greenback’s sudden weakness pulled sterling, the euro and the Australian dollar into positive territory.
“What we have seen is quite a big depreciation [in the yuan] so I think, as we’ve seen in the past, when there are big moves the Chinese authorities are very anxious to ensure the market doesn’t see the renminbi as a one-way bet,” said Jon Harrison, head of emerging markets macro strategy at TS Lombard.
Before the Chinese central bank announcement, the dollar had risen a fourth straight day, benefiting from turbulence caused by the escalating U.S.-China trade conflict and as investors prepared for a U.S. jobs report due later in the day.
The U.S. Labor Department is expected to report non-farm payrolls grew by 190,000 in July after surging by 213,000 in June.
Trade worries continue to rattle markets despite the backdrop of a strong U.S. economy. China has said it will retaliate if U.S. President Donald Trump follows through on a threat to increase tariffs to 25 percent from 10 percent on $200 billion in Chinese imports.
“Now there are signs of an opening to reset the relations this could be an indirect signal that China is sending to the U.S. administration showing that they are effective on their end of the deal in controlling the moves, if that comes in the greater context of a normalisation of trade frictions,” said Cristian Maggio, head of emerging markets strategy at TD Securities.
Worries about the impact that tariffs would have on growth spread from Asian to European markets on Thursday, where equity markets tumbled..
The Australian dollar, seen as a proxy for Chinese growth, had been under pressure as the Sino-U.S. trade tensions undermined upbeat retail sales data at home.
The Aussie fell to an 11-day low of $0.7354 before recovering to trade up 0.3 percent at $0.7389. (Additional reporting by Tommy Wilkes, Claire Milhench and Sujata Rao Editing by Matthew Mpoke Bigg)