* Dollar/yuan falls sharply, dragging down dollar broadly
* Dollar slips on profit-taking ahead of Trump inauguration
* Some see ‘Trump rally’ ending, others expect longer leg
By Hideyuki Sano
TOKYO, Jan 5 (Reuters) - The dollar stepped further away from a 14-year peak against a basket of major currencies on Thursday as market players were spooked by sharp falls in the dollar against the Chinese yuan.
The yuan rose sharply for two days in a row to hit near two-month highs, wrong-footing speculators that had bet on the yuan weakening further due to capital outflows from China.
Unexpectedly big falls in the dollar against the yuan had knock-on effects on the dollar against major currencies, such as the yen and the euro, as traders rushed to cut back their bets on the dollar there as well.
“It’s not clear exactly how the yuan’s strength should help other major currencies against the dollar. Yet, considering that the renminbi had been a major piece of the puzzle in the dollar’s strength, a reversal in the dollar/yuan tends to dampen momentum for overall buying in the dollar,” said a senior currency trader at a major Japanese bank.
The dollar’s index against a basket of six major currencies slipped to as low as 101.86, a three-week low, just two days after it had hit a 14-year high of 103.82 on Tuesday, when a strong reading from a U.S. manufacturing survey boosted the greenback.
The euro rose as much as 0.7 percent in Asia to $1.0563, extending its recovery from a 14-year low of $1.0340 touched on Tuesday.
The dollar slipped almost one percent at one point to 116.08 yen, though it has so far managed to stay above its Dec. 30 low of 116.05.
The dollar’s retreat also came as investors locked in gains from its two-month-old rally after Donald Trump won the U.S. presidential election.
The dollar had soared on Trump’s plans to cut taxes, boost fiscal spending and protectionist trade rhetoric, all seen as inflationary and lifting U.S. bond yields.
But uncertainty on exactly what his presidency will bring is prompting some players to close their bets on the dollar ahead of Trump’s planned news conference on Jan. 11. He will be inaugurated on Jan. 20.
“Some people say the ‘Trump rally’ has come to an end already. Others say the real rally will begin after he takes office,” said Kyosuke Suzuki, director of forex at Societe Generale. “It’s not clear what the market’s next theme will be.”
“Recent economic data is pretty good so markets are on risk-on mode overall and the dollar is supported. But U.S. bond yields are being capped so the dollar is losing its drive for further gains,” said Yukio Ishizuki, currency strategist at Daiwa Securities.
U.S. bond yields edged down on Wednesday, with the 30-year yield hitting a four-week low, even as the minutes from the Federal Reserve’s December policy meeting showed almost all policymakers thought the economy could grow more quickly because of fiscal stimulus under the Trump administration.
The Chinese yuan rose more than one percent to a high of 6.7989 to the dollar in offshore trade a day after Chinese authorities tried to shore up the currency with higher a mid-point and intervention by state-owned banks.
Although Beijing set the mid-point for the daily trading range in line with market expectations on Thursday, short-covering in the yuan continued.
“There had been speculation that China plans to weaken the yuan against the dollar after the change in its currency basket at the end of last year. But the exact opposite has happened and I’d guess the Chinese policy-makers didn’t want a one-sided market,” said Daisuke Uno, chief strategist at Sumitomo Mitsui Bank.
Separately, a private survey on China’s services sector showed growth in the industries accelerated to a 17-month high in December, underpinning risk sentiment.
The Australian dollar hit a two-week high of $0.7321. (Editing by Richard Borsuk and Simon Cameron-Moore)