* Dollar rises above 110 yen for first time since last May
* Yuan strengthens after U.S. FX manipulator label dropped
* China trade data beats consensus, fans optimism
* Sterling weak after soft data fans BoE rate cut bets
* Graphic: World FX rates in 2019 tmsnrt.rs/2egbfVh
TOKYO, Jan 14 (Reuters) - The yen plumbed eight-month lows while China’s yuan climbed to its highest level since July on Tuesday, as the U.S. Treasury Department reversed its decision in August to designate China as a currency manipulator.
The announcement came as Chinese Vice Premier Liu He arrived in Washington ahead of Wednesday’s signing with U.S. President Donald Trump of a preliminary trade agreement aimed at easing tensions between the two countries.
“Washington’s decision to lift its designation of currency manipulator on China has added to the positive mood that has been already in place ahead of the signing of the trade deal,” said Minori Uchida, chief currency strategist at MUFG Bank.
People familiar with the negotiations said that although the manipulator designation had no real consequences for Beijing, its removal was an important symbol of goodwill for Chinese officials.
The dollar rose as much as 0.25% to 110.22 yen, its highest since late May against the safe-haven Japanese currency. It last stood at 110.04 yen, capped at a technical resistance from Bollinger band around 110.22.
Uchida said the dollar/yen is likely to face an uphill battle beyond the 110 yen mark, because the dollar is already expensive relative to the U.S.-Japan yield gap which it tracks fairly closely.
“The main driver of the dollar/yen is the yield gap. Last year, when the dollar was above 110 yen, the yield gap was about 2.4 percentage points. Right now it is about 1.8-1.9 percentage points. And we could see a setback if the upcoming trade deal does not go beyond what has been already reported,” he added.
In addition to hopes of easing in U.S.-China trade war, solid China’s trade data helped to boost optimism on the Chinese economy and the yuan.
Exports grew 7.6% and imports jumped 16.3% in December from a year earlier, both handily beating expectations.
In the onshore trade, the yuan strengthened to 6.8731 per dollar, its strongest level since late July, gaining 0.4% on the day.
The offshore yuan also firmed to its strongest level in six months, hitting 6.8662 before easing slightly to 6.8725 .
“We are likely to see a cyclical recovery in the Chinese economy during the first half of this year. Chinese firms have slashed inventories to a very low level so any moves to rebuild them could easily lead to a pick up in growth for a quarter or two,” said Ei Kaku, senior strategist at Nomura Securities.
“That should also support capital inflows. The yuan is likely to stick around 6.8 per dollar though we think it could weaken in the second half of this year due to various risks and uncertainties,” she said.
The risk-on mood in financial markets mildly supported the euro against the dollar.
The European common currency, on a recovery after hitting a two-week low of $1.10855 on Friday, last traded at $1.1137 .
Sterling came under renewed pressure after data showed Britain’s economy grew at its weakest annual pace in more than seven years in November, raising the chances of a cut to interest rates.
Sterling traded at $1.2990, having fallen to a three-week low of $1.2961 on Monday. The currency has become the worst performer so far this year with fall of 2.0% against the dollar.
Money markets forecast a almost 50% probability of a cut at an upcoming meeting on Jan. 30.
The Australian dollar was lethargic, struggling to get any lift from upbeat economic data of late, as weeks of bushfires have darkened the mood toward the economy. The currency slipped 0.1% to $0.6893. (Reporting by Hideyuki Sano; editing by Richard Pullin & Simon Cameron-Moore)
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