August 3, 2018 / 12:59 AM / 3 months ago

FOREX-Dollar firm on US-China trade war worries

* U.S. escalates trade conflict with new tariff plan

* Yuan near more than 14-month low, Aussie pressured

By Daniel Leussink

TOKYO, Aug 3 (Reuters) - The dollar stayed firm against the yuan and a basket of currencies on Friday, with markets gripped by worries over escalating trade tensions between the United States and China.

China vowed on Thursday to retaliate if the U.S. acted on a threat to raise tariffs on the Asian nation’s exports, after U.S. President Donald Trump instructed his trade officials to look at increasing tariffs to 25 percent from 10 percent on $200 billion in Chinese imports into the United States.

But, as the United States imports far more from China, than China does from the United States, investors see a trade war causing greater pain for the Chinese economy.

“It seems that the markets are reacting to the U.S.-China trade war as the U.S. is the winner whereas China is the loser,” said Masafumi Yamamoto, chief currency strategist at Mizuho Securities.

“The Chinese markets are generally weak, That’s why renminbi’s weakness is leading the dollar’s strength,” he said.

China’s offshore yuan, which has been under pressure for months due to worries over the trade rift, traded at 6.8725 yuan per dollar, after touching as low as 6.8828 yuan per dollar the previous day, its weakest since May 2017.

“Chinese authorities want to engineer the moderate weakness, the slow depreciation of the renminbi but it is very difficult,” said Yamamoto.

The dollar index, which measures the greenback against a basket of six other currencies, hit a fresh two-week high of 95.190. The euro traded at $1.1583, its weakest since July 19.

The Australian dollar, seen as a proxy for Chinese growth because of Australia’s export-reliant economy, traded at $0.73595, close to a two-week low of $0.7355 touched the previous day.

Elsewhere, the pound remained soft even after the Bank of England on Thursday raised its policy interest rate from 0.5 percent to 0.75 percent following an unanimous decision of its nine-member policy board.

Sterling on Friday edged down to a fresh two-week low of $1.3012.

Bank of England Governor Mark Carney said monetary policy needed to “walk not run” while expressing worries about the risks of a cliff-edged Brexit.

A cliff-edged Brexit could lead to higher tariffs and other strict rules on the border, which will hurt the U.K. economy, said Mizuho Securities’ Yamamoto.

“These are the things traders have on their mind so they cannot fully follow the hawkish signs of the Bank of England,” he said. (Editing by Simon cameron-Moore)

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