* Euro, yen little changed; focus on Sino-U.S. trade wars
* Yuan off 11-month low after PBOC assurances
* Short-term yuan implied volatilities surpass euro, yen vols
* Dollar may be undermined by slip in U.S. yields
By Hideyuki Sano
TOKYO, July 5 (Reuters) - Major currencies were on tenterhooks on Thursday on the eve of Washington’s deadline to impose tariffs on Chinese imports while the yuan held steady after the central bank this week sought to stem its recent tumble.
The euro stood little changed at $1.1662, having found firm support near $1.15 over the past few weeks despite worries about an economic slowdown and political instability in Europe.
The dollar traded at 110.38 yen, off a six-week high of 111.14 set on Tuesday.
The offshore yuan fetched 6.6478 per dollar, keeping some distance from Tuesday’s 11-month low of 6.7344, following reassuring remarks from Yi Gang, governor of the People’s Bank of China (PBOC).
“The market has gotten the message from the PBOC and in China that they don’t want a rapid weakening of the offshore yuan after it broke the 6.7 level,” said Shinichiro Kadota, senior FX & rates strategist at Barclays in Tokyo.
“Chinese authorities have been clear they don’t want to use the weaker yuan as a major foreign exchange trade policy...if they were to target a weaker yuan, it could potentially lead to problems, such as capital outflows experienced back in 2015,” Kadota said.
Yet market players are nervous as they braced for a full-scale Sino-U.S. trade war. Washington has said it would implement tariffs on $34 billion of Chinese imports on July 6, and Beijing has vowed to retaliate in kind on the same day.
China’s finance ministry, however, said on Wednesday Beijing will “absolutely not” fire the first shot in a trade war with the United States and will not be the first to levy tariffs.
As investors tried to hedge against further gyrations in the yuan, the implied volatility of one-week dollar/yuan options has risen to a five-month high this week. It was last quoted at 7.275 percent.
That was above the implied volatilities of the euro/dollar , which stood at 6.675 percent, for the first time ever. The yen’s one-week volatility was quoted at 6.750 percent, also the first time since late 2015 it traded below volatility in the yuan.
Because of Beijing’s control, the yuan’s implied volatility had long stayed below that of major free-float currencies such as the euro and the yen.
The British pound held firm at $1.3224 after a survey on Wednesday showing Britain’s dominant services industry gained momentum last month fuelled expectations of a Bank of England interest rate rise this summer.
The Canadian dollar also held near three-week high, helped by rise in oil prices.
The loonie stood at C$1.3146 to the dollar, having risen to C$1.3113 on Wednesday, its highest since mid-June.
The index of the U.S. dollar against six other major rivals was at 94.511, having slipped to 94.397 on Wednesday, its lowest level in over a week.
While the dollar has been supported by the perception of the relative strength of the U.S. economic growth and the attraction of its higher bond yields, some market players say recent falls in U.S. bond yields may be undermining the dollar. (Additional reporting by Daniel Leussink Editing by Shri Navaratnam and Sam Holmes)