Dollar finds footing as Sino-U.S. tensions escalate

© Reuters. 3D printed percentage symbols are seen in front of dollar banknotes in this illustration

By Tom Westbrook

SINGAPORE (Reuters) - The dollar crept off milestone lows against other majors on Thursday, and held on to gains against the yuan, as heightened Sino-U.S. tension put a bit of caution into currency markets.

The United States gave China until Friday to close its consulate in Houston amid accusations of spying, and President Donald Trump said it was "always possible" other Chinese missions could be ordered to close as well.

China has vowed to respond and the escalation in tension between the world's two largest economies sent the yuan <cnh=>on its sharpest slide in nearly two months on Wednesday and has helped the greenback find support in Asian trade on Thursday.</cnh=>

The euro (EUR=EBS) sat at $1.1571, about 0.3% below a 21-month high of $1.1601, which it hit overnight in the afterglow of Europe's leaders agreeing on a coronavirus rescue package.

The Australian dollar <aud=d3>pulled back from a 15-month peak and was steady at $0.7143, while the kiwi <nzd=d3>retreated slightly from a six-month top to sit at $0.6657.</nzd=d3></aud=d3>

Volumes were lightened by a public holiday in Japan.

"The market is still trying to ascertain whether this increase in geopolitical tension is going to be enough to derail the positive vibes we've been seeing," said Rodrigo Catril, senior FX strategist at National Australia Bank (OTC:NABZY) in Sydney.

"Recent history will tell you that the market will tend to digest this stuff and carry on in its merry way...but a bit of caution is warranted, and the yuan moving higher is probably the canary in the coalmine that we need to keep an eye on."

The yuan is a barometer of Sino-U.S. relations and it fell 0.6% to a one-week low of 7.0174 per dollar in offshore trade on Tuesday.

China's midpoint for the onshore trading band <cny=pboc>was fixed weaker than expected on Thursday, suggesting there is more to come in this fresh flashpoint.</cny=pboc>

Still, the lift to the dollar was pretty modest. It edged off a four-month low against a basket of currencies (=USD) to 94.980.

The safe-haven Swiss franc <chf=>found support near a four-month top at 0.9287 per dollar, while the yen <jpy=>was rangebound at 107.15 per dollar.</jpy=></chf=>

U.S.-China ties have worsened sharply this year over issues ranging from the coronavirus and telecoms-gear maker Huawei, to China's territorial claims in the South China Sea and clampdown on Hong Kong.

The U.S. State Department said the Chinese mission in Houston was being closed "to protect American intellectual property and Americans' private information."

Chinese state media said on Thursday that the move was a political ploy ahead of November presidential elections, and one source with knowledge of the matter told Reuters that China was considering closing the U.S. consulate in Wuhan in response.

"It seems escalation is inevitable in the near term," said Commonwealth Bank of Australia (OTC:CMWAY) currency analyst Joe Capurso. "The upshot is CNH is likely to weaken further and broader currency volatility increase."

Elsewhere the South Korean economy entered recession and exports posted their worst plunge since 1963.

Investors are also expecting weekly U.S. jobless claims, due at 1230 GMT to hold relatively steady.

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