FOREX-Currency markets resume risk-on rally, shrugging off U.S.-China consulate spat

* "Risk-off" move sparked by U.S.-China tensions
* Dollar erases some overnight losses
* Graphic: World FX rates in 2020 https://tmsnrt.rs/2RBWI5E
*

(Updates throughout, adds commentary and chart)
By Elizabeth Howcroft
LONDON, July 22 - Currency traders regained their risk
appetite on Wednesday, shrugging off U.S.-China tensions and
resuming the risk-on moves that have dominated since European
Union leaders agreed on a fiscal stimulus plan on Tuesday.
Risk appetite in currency markets diminished for around two
hours, after China's foreign ministry said the United States had
told China on July 21 to close its consulate in Houston, in
Texas. The move marked a deterioration in U.S.-China relations,
which have become more fraught since the outbreak of COVID-19.
The headlines from Houston caught traders off-guard, said
Westpac FX analyst Sean Callow, sparking fears that this latest
dispute could be the one to halt the U.S.-China trade deal,
although he considers that unlikely.
The currency market's reaction was short-lived. The dominant
mood remained optimistic, following the EU's agreement on a 750
billion-euro recovery fund to share the debts incurred during
the coronavirus crisis. "For now, investors are still buying into the recovery story
despite the building China-U.S. tensions again and for now at
least that still seems to be the path of least resistance," said
Jeremy Stretch, head of G10 FX strategy at CIBC Capital Markets.
After gaining on the U.S.-China headlines, the dollar index
resumed falling and was down 0.1% at 95.028 at 1050 GMT. The
last time it was this low was on March 9; before that it had not
seen such lows since October 2018.
The euro - which has rallied since the EU recovery fund was
first proposed in May - continued to gain, reaching a new high
of $1.1584, its strongest since October 2018 EUR=EBS .
"I think it may well be the case that there's some leveraged
players who've been closing out short positions," said CIBC's
Stretch.
The Australian dollar was up 0.3% at $0.71530 AUD=D3 and
the New Zealand dollar was up 0.4% at $0.6665 NZD=D3 .
A flare-up of coronavirus cases and the reintroduction of
lockdown measures in Australia's second-largest state had little
impact on the currency, even after reports that the latest virus
outbreak will cut the country's third-quarter GDP growth by 0.75
percentage points. The Chinese offshore yuan, which weakened past 7 per dollar
on U.S.-China headlines, was slower to recover, at 6.9954
CNH=EBS .
Meanwhile, sterling fell versus the dollar and euro, driven
by a report in the Financial Times that the British government
has abandoned hopes of clinching a free-trade deal with the
United States by the end of the year. THE WEAKER DOLLAR
The dollar was weakened earlier in the session by concern
about a delay to U.S. fiscal stimulus, as Republicans and
Democrats struggle to reach a consensus on the next round of
stimulus. "Somehow, everything looks a little better for the euro than
for the dollar. One-nil for it in the fight against the virus
and the recession," Antje Praefcke, Commerzbank FX and EM
strategist, wrote in a note to clients.
MUFG strategist Derek Halpenny noted the dollar had weakened
in 2010-12, which was also a period when real U.S. Treasury
yields were falling.
"We are of a long way off another form of hawkish guidance
the like of May 2013, so new lows in 10-year real yields look
likely which will only reinforce the medium-term negative
outlook for the dollar," he said.
The United States reported more than 1,000 deaths from
COVID-19 on Tuesday, according to a Reuters tally, the first
time since June 10 the nation has surpassed that milestone.
California was close to passing New York in total infections.
U.S. President Donald Trump shifted his rhetoric and tone on
Wednesday, saying that the coronavirus pandemic would get worse
before it got better. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
US real yield falls https://tmsnrt.rs/3eJMD1m
euro https://tmsnrt.rs/3juvg8k
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