CORRECTED-FOREX-China's yuan weakens but falling yen points to risk recovery

(Corrects headline and paragraph 1 show yen down not up)
* Offshore yuan at seven-week low, euro dragged downwards
* But drop in safe-haven yen signals ebbing virus fears
* Sterling tumbles after UK PM takes tough line in EU talks
* Graphic: World FX rates in 2019 http://tmsnrt.rs/2egbfVh

By Dhara Ranasinghe
LONDON, Feb 3 (Reuters) - China's offshore yuan dropped to a
more than seven-week low on Monday, but a drop in the safe-haven
Japanese yen suggested fears surrounding the spread of
coronavirus in China were ebbing for now.
Chinese markets took a beating in the first trading session
after an extended Lunar New Year break. The offshore yuan
dropped as low as 7.023 yuan per dollar CNH=EBS . The dollar
was last up 0.3% against the Chinese currency.
Yet the slide in Chinese assets was mostly a product of
selling pressure that had built up over the holiday and not a
reflection of new market fears, analysts said.
In an effort to head off any panic, the Chinese government
took a range of steps to shore up its economy, including cutting
its key interest rate. European stocks rose .STOXX and the yen fell 0.3% to
108.67 per dollar JPY=EBS , off a three-week high of 108.305
set on Friday.
The Swiss franc, also considered a safe haven, was mixed,
falling against the dollar CHF=EBS but rising slightly versus
the euro EURCHF=ENS .
"Chinese markets are just catching up with the risk off
moves in the past week," said Adam Cole, chief currency
strategist at RBC Capital Markets.
"The fact that we haven't had any more bad news over the
weekend means that there is a bit of a sigh of a relief, so
dollar/yen and risk markets are faring better."
The dollar rallied more than 1% against the onshore yuan
from levels before the holiday to 7.0268 CNY=CFXS .
The weaker yuan also dragged the euro lower, noted Kit
Juckes at Societe Generale, because the Chinese currency has the
biggest weight in the basket that determines the value of the
European Central Bank's trade weighted euro index.
The euro weakened 0.3% to $1.1062 EUR=EBS .
The dollar was up against a basket of rivals, with the
dollar index up 0.3% to 97.685 .DXY .
The Australian dollar fetched $0.66945 AUD=D3 , up 0.1% on
the day but holding near a 10-1/2-year low of $0.6670 touched
last October.
The currency is often regarded as a proxy for the yuan,
being more freely traded and because of Australia's reliance on
trade with China.
Sterling tumbled after Britain laid out a tough opening
stance for future talks with the European Union following its
departure from the bloc last week.
Prime Minister Boris Johnson's government signalled over the
weekend that Britain would set its own agenda rather than
meeting the bloc's rules, reviving fears of a hard Brexit at the
end of an 11-month transition period. "Brexiteer politicians are moving from celebrating the exit
to sounding bold as the trade talk verbal jousts begin. The FX
market is likely to be nervous and with positioning data still
suggesting an excessively long speculative position in the
market, sterling is vulnerable," Juckes at Societe Generale
said.
Sterling fell as low as $1.3055 GBP=D3 , down 1.2% and
undoing all of its gains following the Bank of England's
decision last week to keep interest rates on hold. Against the
euro the pound slid to as low as 83.95 pence EURGBP=D3 .