FOREX-Dollar slows slide as Sino-U.S. tensions escalate

* Euro, AUD, NZD retreat from milestone peaks
* Investors wary of China's response to Houston consulate
closure
* S. Korea deep in recession
* Graphic: World FX rates in 2020 https://tmsnrt.rs/2RBWI5E

By Tom Westbrook
SINGAPORE, July 23 (Reuters) - The dollar crept off
milestone lows against other majors on Thursday, and held on to
gains against the yuan, as heightened Sino-U.S. tensions kept
currency markets cautious.
The United States gave China until Friday to close its
consulate in Houston amid accusations of spying, and President
Donald Trump said it was "always possible" other Chinese
missions could be ordered to close as well. China has vowed to respond, and the escalation in tension
between the world's two largest economies sent the yuan CNH=
on its sharpest slide in nearly two months on Wednesday and
helped the greenback find support in Asia on Thursday.
The euro EUR=EBS sat at $1.1580, about 0.2% below a
21-month high of $1.1601, which it hit overnight in the wake of
Europe's leaders agreeing on a coronavirus rescue package.
The Australian dollar AUD=D3 pulled back from a 15-month
peak and drifted around $0.7151, while the kiwi NZD=D3 was a
touch below Wednesday's six-month top at $0.6678.
Moves were slight and volumes were lightened by a public
holiday in Japan.
"The market is still trying to ascertain whether this
increase in geopolitical tension is going to be enough to derail
the positive vibes we've been seeing," said Rodrigo Catril,
senior FX strategist at National Australia Bank in Sydney.
"Recent history will tell you that the market will tend to
digest this stuff and carry on in its merry way...but a bit of
caution is warranted, and the yuan moving higher is probably the
canary in the coalmine that we need to keep an eye on."
The yuan is a barometer of Sino-U.S. relations and it
recovered a little from a one-week low, but kept to the weak
side of the 7-per-dollar mark at 7.0030 in offshore trade.

DEAL WATCH
However, dollar gains were limited with the greenback barely
lifting from a four-month low against a basket of currencies
=USD , sitting at 94.931. July so far is its worst month
against the euro since January 2018 and that weakness is fanning
out across the board.
Caution and dollar softness helped the safe-haven Swiss
franc CHF= to a four-month top of 0.9281 per dollar, but the
yen JPY= was rangebound at 107.13 per dollar.
U.S.-China ties have worsened sharply this year over issues
ranging from the coronavirus and telecoms-gear maker Huawei, to
China's territorial claims in the South China Sea and clampdown
on Hong Kong.
The U.S. State Department said the Chinese mission in
Houston was being closed "to protect American intellectual
property and Americans' private information."
Chinese state media said on Thursday that the move was a
political ploy ahead of November presidential elections, and one
source with knowledge of the matter told Reuters that China was
considering closing the U.S. consulate in Wuhan in response.
Citi analysts expect some kind of Chinese reply, but they do
not think it will derail the trade deal - which is the main
focus for markets - and advise betting yuan rises.
"We think the Phase One trade deal is likely to hold into
the U.S. election and the market may shift attention to China's
relative economic outperformance," said Johanna Chua, a Citi
strategist in Hong Kong, in a note.
Other threats to the global coronavirus recovery are also
growing.
South Korea slipped into its first recession since 2003 as
the country's exports fell by the most since 1963, showing
Asia's fourth-largest economy has a considerable road back to
recovery. Another day with more than 1,100 U.S. coronavirus fatalities
also underscored the growing risk to recovery there. Weekly
jobless claims due at 1230 GMT will offer the next checkup on
economic progress.