U.S. dollar remains weak while Chinese Yuan collapsed

The U.S. dollar held on to gains against the Chinese yuan on Thursday. This was while heightened Sino-U.S. tensions kept currency markets wary.

China has time until Friday to close its consulate in Houston due to accusations of spying. President Donald Trump stated that it is always possible to order other Chinese missions to close as well. Meanwhile, China has declared that it will retaliate.

The resultant escalation in tension between the world’s two largest economies caused the yuan to collapse to its lowest point in nearly two months on Wednesday. It also helped the dollar to find support in Asia on Thursday.

Citi analysts expect that China will issue some kind of reply. However, they don’t think it will derail the trade deal, which is the main focus for forex markets.

Johanna Chua, the Citi strategist in Hong Kong, noted that they think the Phase One trade deal will likely hold into the U.S. election. At the same time, the market may shift attention to China’s relative economic outperformance.

How did the Euro fare?

The euro traded at $1.1580 on Thursday. It was about 0.2% lower from a 21-month high of $1.1601. The euro hit this point overnight after Europe’s leaders agreed on a coronavirus rescue package.

Meanwhile, the Australian dollar declined from a 15-month peak, tumbling down to $0.715. The New Zealand dollar was slightly below Wednesday’s six-month peak at $0.6678.

Rodrigo Catril, the senior FX strategist at National Australia Bank in Sydney, stated that the market is still trying to ascertain whether this jump in geopolitical tension will be enough to derail the positive vibes.

According to him, the recent history shows that the market may tend to digest this stuff and carry on in its merry way. However, a bit of caution is warranted, and investors need to keep an eye on the Chinese yuan.

U.S. dollar gains were limited, as the greenback barely rose from a four-month low versus a basket of currencies, sitting at 94.931.