FOREX-Currency markets flip to "risk-off" after U.S.-China tensions escalate

* "Risk-off" move sparked by U.S.-China tensions
* Dollar erases some overnight losses
* Graphic: World FX rates in 2020 https://tmsnrt.rs/2RBWI5E
*

By Elizabeth Howcroft
LONDON, July 22 - Risk appetite in currency markets
diminished in early London trading on Wednesday, with the dollar
partially erasing its overnight losses, after China's foreign
ministry said the United States told China on July 21 to close
its consulate in Houston.
The dollar rose and the euro fell, reversing the "risk-on"
trend of the previous 24 hours, after China's foreign ministry
said at around 0730 GMT that it had received the abrupt
notification -- an escalation of recent U.S.-China tensions.
Beijing said it strongly condemns the move and threatened
retaliation. Markets had been firmly pro-risk overnight, boosted by hopes
for an economic recovery, with the euro hitting an 18-month high
of $1.1547 after European leaders agreed on a massive stimulus
plan for the euro zone. But these moves reversed after China's statement, with the
euro retreating to $1.1521 by 0804 GMT EUR=EBS .
The dollar index, which had hit its lowest since early March
on Tuesday evening on hopes for an economic recovery, erased
some losses as risk appetite worsened on Wednesday. It was up
0.2% at 95.292, still trading close to four-month lows =USD .
China's offshore yuan weakened past 7 per dollar on the news
and was last at 7.0028 CNH=EBS .
"That headline triggered some profit taking, quite an
aggressive one in USDCNY, USDCNH," said Christy Tan, head of
markets strategy for Asia at National Australia Bank in
Singapore.
"It's a timing issue. All this is coming as tensions between
the U.S. and China are escalating. This added fuel to fire," she
said.
Westpac FX analyst Sean Callow said the headlines from
Houston had caught traders off-guard, sparking fears that
perhaps this latest dispute could be the one to halt the
U.S.-China trade deal, something he rates as unlikely.
"I'd be a bit surprised if there's much follow through ...
it's probably just a wobble," he said.
The Australian dollar erased the day's gains. Having hit a
new high of $0.7168 versus the U.S. dollar -- its strongest
since April 2019 -- at 0711 GMT, it then retreated to $0.7129,
flat on the day AUD=D3 .
A flare-up of cases and the reintroduction of lockdown
measures in Australia's second-largest state had little impact
on the currency, even after reports that the latest virus
outbreak will cut the country's third-quarter GDP growth by 0.75
percentage points. The New Zealand dollar also erased its gains from earlier in
the session and was flat on the day at $0.6641 NZD=D3 .
The dollar was weakened earlier in the session by concerns
about a possible delay to U.S. fiscal stimulus, as the
Republicans and Democrats struggle to reach a consensus on the
next round of economic stimulus measures. "Somehow everything looks a little better for the euro than
for the dollar. One-nil for it in the fight against the virus
and the recession," Antje Praefcke, Commerzbank FX and EM
strategist, wrote in a note to clients.
MUFG strategist Derek Halpenny noted the dollar had weakened
sharply in 2010-12, which was also a period when real U.S.
treasury yields were falling sharply.
"We are of a long way off another form of hawkish guidance
the like of May 2013, so new lows in 10-year real yields look
likely which will only reinforce the medium-term negative
outlook for the dollar," he said.
The United States reported more than 1,000 deaths from
COVID-19 on Tuesday, according to a Reuters tally, the first
time since June 10 the nation has surpassed that milestone.
California was close to passing New York in total infections.
U.S. President Donald Trump shifted his rhetoric and tone on
Wednesday, saying that the coronavirus pandemic will get worse
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US real yield falls https://tmsnrt.rs/3eJMD1m
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