Chinese Yuan and risk-off currencies declined on Wednesday

Risk-off currencies declined on Wednesday. The Australian dollar plummeted down after hitting a new high of $0.7168 against the U.S. dollar. It dropped to $0.7129, flat on the day. Rising coronavirus cases and the renewed lockdown measures in Australia’s second-largest state had little impact on the Aussie thus far.

The New Zealand dollar ended flat on the day at $0.6641. The euro also lowered to $1.1521 on Wednesday after China’s statement.

China’s foreign ministry announced that it had received the abrupt notification about the escalation of recent U.S.-China tensions, causing the risk appetite in forex markets to diminish.

China’s offshore yuan fell past 7 per dollar on the news and last traded at 7.0028. China’s foreign ministry said that the United States told China to close its consulate in Houston on July 21. Beijing threatened retaliation.

How did the U.S. dollar fare?

The U.S. dollar soared on Wednesday as the “risk-on” trend of the previous 24 hours reversed. The greenback partially erased its overnight losses.

Earlier in the week, hopes for an economic recovery bolstered the markets. The euro hit an 18-month high of $1.1547 after the EU agreed on a massive stimulus plan for the eurozone.

However, the dollar index gained 0.2% to 95.292 on Wednesday, even though it traded close to four-month lows.

The headlines from Houston had caught traders off-guard, raising fears that perhaps this latest conflict could be the one to finish the U.S.-China trade deal – stated Sean Callow, Westpac FX analyst. But he thinks that it’s unlikely.

The Democrats and Republicans struggle to reach a consensus on the next round of economic stimulus measures, as well as worries about a possible delay to U.S. fiscal stimulus, weakening the greenback.

According to Antje Praefcke, the Commerzbank FX, and EM strategist, somehow, everything looks a little better for the euro than for the greenback.