May 27, 2020 / 11:30 AM / 3 months ago

FOREX-Euro rallies on EU recovery fund proposals, yuan falls

* Euro heads for two-month high on stimulus proposals

* Offshore yuan stumbles to nine-month low

* Dollar weakens but mood in market turns cautious

* Graphic: World FX rates in 2019: (Adds details, quotes, latest prices)

By Tommy Wilkes

LONDON, May 27 (Reuters) - The euro headed towards a two-month high on Wednesday after the European Commission proposed a coronavirus economic recovery package worth in total 1.85 trillion euros ($2.04 trillion).

The euro has struggled since falling in March, when investors rushed for the safety of dollars. But analysts say the recovery fund proposals, if they can win over EU members sceptical of an earlier Franco-German plan, could push the euro higher.

Should the European Commission approve the new proposal, “it would reduce the risk of a slump in peripheral Europe, notably Italy, and increase the likelihood of a synchronized recovery across the Continent,” said Marshall Gittler, an investment analyst at BDSwiss Group. “It would be positive for the euro.”

The euro rose as high as $1.1031 before falling to $1.1017, still up 0.3%. The dollar, previously higher against a basket of currencies was last down 0.2% at 98.811.

Worries about the U.S. response to China’s proposed security law for Hong Kong injected a more cautious tone into foreign exchange markets.

Some investors are betting on a rapid resumption of economic activity following the crippling coronavirus outbreak. Others worry the threat of U.S. sanctions against China for its treatment of Hong Kong could worsen risk sentiment again. Renewed protests in Hong Kong added to the nervous mood.

“Yesterday’s risk-on rally is already running out of steam. That seems quite right, but not just because of the tensions between the U.S. and China,” said currencies analyst Thu Lan Nguyen at Commerzbank.

Nguyen said the economic outlook remained uncertain as countries re-open their economies, not least in predicting how consumers will behave once they can shop and travel more freely.

The offshore yuan fell to its lowest against the dollar since September of last year, during the U.S.-China trade dispute.

The dollar gained 0.4% at 7.1766 yuan, not far from the offshore yuan’s record low of 7.1975 in September.

Should the onshore yuan, which also eased towards a nine-month low on Wednesday, fall below September’s lows it would be at its weakest since 2008.

U.S. President Donald Trump said on Tuesday the United States would announce before the end of the week its response to China’s planned security bill for Hong Kong.

The dollar rose against Japan’s currency, last trading up 0.1% at 107.72 yen.

Sterling dipped while the Australian dollar briefly hit a two-and-a-half month high of $0.6680. ($1 = 0.9078 euros)

Reporting by Tommy Wilkes in London; editing by Larry King

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