U.S. dollar edged up after the U.S.-China tensions increased

The U.S. dollar climbed up on Wednesday while the euro fell, reversing the “risk-on” trend of the previous 24 hours. China’s foreign ministry stated that it had received the abrupt notification about the escalation of recent U.S.-China tensions, causing the risk appetite in currency markets to diminish.

As a result, the dollar partially erased its overnight losses. According to China’s foreign ministry, the United States told China to close its consulate in Houston on July 21. In response, Beijing threatened retaliation.

Hopes for an economic recovery boosted the markets. They rallied overnight, with the euro hitting an 18-month high of $1.1547 after the EU Republicans and agreed on a massive stimulus plan for the eurozone.

However, the euro declined to $1.1521 on Wednesday after China’s statement. China’s offshore yuan also lowered past 7 per dollar on the news and last traded at 7.0028.

On the other hand, the dollar index gained 0.2% at 95.292, but it still traded close to four-month lows.

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

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

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

How did the Aussie fare?

The Australian dollar tumbled down after hitting a new high of $0.7168 versus the U.S. dollar. It lowered to $0.7129, flat on the day. Meanwhile, the New Zealand dollar plummeted down, ending flat on the day at $0.6641.

So far, surging coronavirus cases and the reintroduction of lockdown measures in Australia’s second-largest state had little impact on the Aussie.