FOREX-Dollar stands its ground as U.S.-China tensions grow

* Equity rally leaves FX market behind
* Sino-U.S. tensions, especially HK, drag on mood
* Offshore yuan hovers near record low, AUD and NZD
pressured
* Graphic: World FX rates in 2020 https://tmsnrt.rs/2RBWI5E

By Tom Westbrook
SINGAPORE, May 28 (Reuters) - The dollar held its own on
Thursday as rising Sino-U.S. tension put crushing pressure on
the Chinese yuan and proved a counterweight to optimism about
the coronavirus recovery.
The escalating war of words between the world's two biggest
economies also spilled over to the Australian and New Zealand
dollars, as a far more cautious mood holds in currency markets
compared with the ebullience rallying stocks. MKTS/GLOB
Hong Kong is the newest flashpoint, with U.S. Secretary of
State Mike Pompeo saying on Wednesday that China's plan to
impose laws there was "only the latest in a series of actions
that fundamentally undermine" the city's autonomy and freedoms.
The Chinese yuan CNH= , a barometer of U.S.-China
relations, hit a record low of 7.1966 per dollar in offshore
trade overnight and held close to that level on Thursday at
7.1805.
The Aussie and kiwi backed off two-month highs hit in the
London session and were becalmed, even as the re-opening of the
world's economies kept stock markets rallying. The Aussie
AUD=D3 was last at $0.6621 and the kiwi NZD=D3 at $0.6188.
"Overall, the macro story is hard to ignore, and things are
picking up," said Jason Wong, senior market strategist at BNZ in
Wellington.
"But down under, here, obviously China is an important part
of what drives markets. Markets are awaiting China's response
(on Hong Kong) and we're caught in the middle a little bit."
A Financial Times report which said coal traders and
analysts expect China to tighten import rules also weighed on
the Australian dollar, he said.
Tensions have flared between Australia and China over the
COVID-19 pandemic, while U.S.-China relations have nosedived
amid regular attacks from the Trump administration over China's
handling of the virus.
The United States is currently crafting a range of options
to punish China over its tightening grip on Hong Kong, including
sanctions, tariffs and restrictions on Chinese companies,
according to people familiar with the discussions. Elsewhere, the dollar was marginally firmer against the
Japanese yen JPY= , at 107.83 yen per dollar, and a touch
weaker on the euro and pound.
Against a basket of currencies =USD it was steady at
98.863, a fraction above a two-month low hit overnight.
The euro EUR= rose to an eight-week peak of $1.1031 on
Wednesday, climbing above its 200-day moving average, after the
European Union's executive unveiled a 750 billion euro plan to
prop up the bloc's virus-hit economies. It pulled back as doubts over the way forward in achieving
the plan emerged and last sat at $1.1021. The pound GBP= was
at $1.2263.
"It is probably too early to say that the rally in the euro
is the start of a major re-rating of European risk," said Chris
Turner, global head of markets at ING, in a note.
"The path to getting (the) recovery fund carved out of the
long term EU budget will be a bumpy one ... thus it is hard to
make the case that euro moves higher in a straight line from
current levels."