Yuan weakens but resilient yen signals risk recovery

London

CHINA'S offshore yuan dropped to a more than seven-week low on Monday, but a recovery 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. The dollar was last up 0.3 per cent 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 and the yen fell 0.2 per cent to 108.49 per dollar, 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 but rising slightly versus the euro.

"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 per cent against the onshore yuan from levels before the holiday to 7.0268.

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 per cent to US$1.1062.

The dollar was up against a basket of rivals, with the dollar index up 0.3 per cent to 97.685.

The Australian dollar fetched US$0.66945, up 0.1 per cent on the day but holding near a 10-1/2-year low of US$0.6670 touched last October.

Sterling tumbled after Prime Minister Boris Johnson's government signalled over the weekend that Britain would set its own agenda rather than meeting the European Union's rules, reviving fears of a hard Brexit at the end of an 11-month transition period.

Sterling fell as low as US$1.3055, down 1.2 per cent 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. REUTERS