The Dollar Rises Slightly as China Relaxes its Policy and the Yen Relaxes

SYDNEY (Reuters) – The dollar rose on Monday as China softened its domestic policy by allowing its yuan to fall, though the decline was not as strong as some people had feared. .

Movements were limited by a lack of liquidity with Japan on vacation and the US bond market paused. A sudden and sharp rise in Treasury yields had underpinned the dollar for much of last week.

The Chinese central bank decided Sunday to support the economy by significantly reducing the level of liquidity that banks should keep as reserves. This was the fourth reduction this year and comes as the economy struggles with the slowdown of a growing trade dispute with the United States.

Beijing then set its yuan at 6.8957 for CNY = CNFX, the lowest since May of last year but still below the psychological level of 6.9000 that dealers had envisioned.

The fix left the dollar trading at 6.9056 on the CNH = spot market, but at a rapid high of 6.9157.

"The latest reduction in China's reserves is another step in trying to support the national economy, despite the headwinds of trade tensions," said Westpac strategist Frances Cheung.

"Yet, if the cutback can help Chinese government bond yields stabilize around their lows against higher US yields, it is also putting upward pressure on the USD / CNY . "

Any decline in the yuan tends to undermine other emerging currencies as they must depreciate to keep their exports competitive. This supports the yen and the dollar, especially when US yields are rising.

Returns on 10-year Treasury bonds US10YT = The unemployment rate hit a seven-year high on Friday, with data showing that the unemployment rate fell to its lowest level since 1969.

"The employment report gives no reason to believe that the job market is losing momentum," said Kevin Cummins, US economist for NatWest Markets.

"As a result, the Federal Reserve 's plan for gradual rate hikes by the end of the year and beyond should remain largely intact.

Against a basket of currencies, the dollar rallied slightly at 95.682 .DXY after hitting a six-week high of 96.121 last week.

The dollar edged up to 113.90 JPY yen after peaking at 114.55 last week, its highest level since last November. The resistance of the cards around 114.70 / 75 remains a major obstacle.

The euro hovered around 1.1520 USD, rebounding slightly from its recent six-week low of 1.1462 USD.

Italian policy remained a drag as the European Commission warned that the country's budget deficit violated past commitments, leading Rome to insist that it "not pull out" of its spending plans.

The pound sterling stands at 1.3120 USD = amid speculation, Britain was getting close to an exit agreement with the European Union.

Brexit negotiators within the EU believe that an agreement with Britain on the block's exit is "very near," sources said. A compromise on a critical point, the future Irish border, could be envisaged.

The Brazilian real was at 3.8364 for a BRL = dollar after polls in the presidential election showed that right-wing congressman Jair Bolsonaro was heading for a second round against leftist Fernando Haddad.