FOREX-Dollar edges higher as U.S.-China worries resurface

* Graphic: World FX rates in 2020 https://tmsnrt.rs/2RBWI5E
* Markets swing between risk-on and risk-off
* Dollar viewed as safe-haven currency
* Euro eyes details of rescue fund

By Stanley White
TOKYO, May 27 (Reuters) - The dollar edged higher on
Wednesday as worries about the U.S. response to China's proposed
security law for Hong Kong supported safe-haven demand for the
greenback.
The euro held gains against the dollar and the pound but
faces a severe test when the European Commission is expected to
release details of a financial rescue fund for the bloc later on
Wednesday.
Financial markets have been caught in a tug-of-war between
optimism and pessimism about the global outlook.
Some investors are betting on a resumption of normal
economic activity following the crippling coronavirus pandemic,
but others worry the threat of U.S. sanctions against China for
its treatment of Hong Kong could easily worsen risk sentiment
yet again.
"We are in a broad risk-on trend, but the only thing that
can change this is the U.S.-China relationship," said Junichi
Ishikawa, senior FX strategist at IG Securities in Tokyo.
"More problems between these two countries would slow the
dollar's recent decline and potentially lead to dollar buying as
a safe haven."
The dollar edged up to $1.2321 against the pound on
Wednesday in Asia, pulling away from its lowest level in two
weeks.
The dollar traded at $1.0983 per euro EUR=EBS , close to a
one-week low.
It bought 0.9655 Swiss franc CHF=EBS in Asia, nursing a
0.6% loss in the previous session.
The Australian dollar AUD=D3 fell 0.3% to $0.6636, while
the New Zealand dollar NZD=D3 fell 0.2% to $0.6185 as worries
about U.S.-China tensions hurt demand for riskier assets.
The Aussie and the kiwi are often traded as liquid proxies
for risk because of their close ties to China's economy and
global commodities.
The dollar remained locked in a narrow range against the
Japanese currency, trading at 107.51 yen JPY=EBS .
Many of the places that were hardest hit by the coronavirus
pandemic are now allowing more businesses to resume normal
operations, causing investors to unwind safe-haven bets and push
the dollar lower on Tuesday.
However, the move faded on Wednesday as Asian stocks fell
and U.S. Treasury yields fell, showing risk aversion remains a
factor.
U.S. President Donald Trump said on Tuesday the United
States will announce before the end of the week its response to
China's planned security bill for the former British colony of
Hong Kong. Trump's administration is considering sanctions on Chinese
officials, Bloomberg News reported.
The United States and China have repeatedly clashed over
trade policy, advanced technology, and China's response to the
coronavirus, which originated in the central province of Hubei
late last year.
Another row between the world's two superpowers over civil
liberties in Hong Kong could prompt a return to risk-off trades
that favour dollar gains, declining equities, and rising bond
prices.
Further gains in the euro depend on whether policymakers can
narrow their differences on how to fund an economic rescue
package for the euro zone, traders say.
France and Germany have proposed a 500 billion euro
coronavirus recovery fund that would issue grants to help the
bloc's economic recovery from the coronavirus pandemic.
Austria, Sweden, Denmark, and the Netherlands have opposed
this plan, calling instead for a loans-based approach.
The European Commission is to present its own proposal for a
recovery fund later on Wednesday, which could determine the
near-term direction of the euro.