September 5, 2018 / 1:29 AM / 14 days ago

FOREX-Dollar holds onto gains as trade tensions linger

* Emerging market currency index near its lowest since May 2017

* Dollar trades higher vs euro, yen

* Aussie, Kiwi hover near multi-year lows

* Graphic: World FX rates in 2018 tmsnrt.rs/2egbfVh

By Daniel Leussink

TOKYO, Sept 5 (Reuters) - The dollar largely held onto gains on Wednesday as the lingering threat of a major escalation in the trade conflict between the United States and China weighed on risk sentiment.

Fears of a hit to global growth from U.S. President Donald Trump’s ‘America First’ protectionist policies have kept markets in a state of heightened anxiety for much of this year.

Trump could follow through on plans to impose levies on $200 billion more of Chinese imports after a public comment period on the new tariffs is set to end on Thursday, though it is unclear how quickly that will happen.

The dollar index, which measures the greenback against a basket of six currencies, was steady at 95.403 after hitting a two-week high of 95.737 during the previous session.

“Trump does what he says he’ll do in one form or another, so I expect tariffs will be implemented,” said Ayako Sera, market economist at Sumitomo Mitsui Trust Bank.

“The consensus is that Trump will take some kind of action because everyone believes that he does what he says he’ll do. Markets will be surprised if he doesn’t do anything,” she said.

The dollar drew further support from upbeat U.S. indicators underlining the case for further interest rate increases by the Federal Reserve.

U.S. manufacturing activity accelerated to more than a 14-year high in August, boosted by a surge in new orders. The positive figures helped U.S. Treasury yields rise to three week highs.

Emerging market currencies fell overnight as investors feared these export-oriented economies would be caught in the crossfire of any escalating trade conflict.

The South African rand lost about 3 percent against the greenback on Tuesday as the economy unexpectedly slipped into a recession in the second quarter, while the Turkish lira and Mexican peso were also down.

A JPMorgan emerging market currency index on Wednesday hovered near a 15-month low reached during the previous session.

“It is hard to see buying of emerging market currencies while heading into tariff problems,” Sera said.

The dollar rose about 0.2 percent to 111.68 yen on Wednesday, and edged up against the euro to $1.1585.

The Australian dollar was barely changed at 0.7176, after falling as low as $0.7157 on Tuesday, its lowest level since May 2016.

Australia’s second-quarter gross domestic product figures due later on Wednesday were seen likely to show the economy notched up its 27th year without a recession.

The New Zealand dollar lost about 0.2 percent to $0.6537, trading near $0.6530, its lowest level since February 2016.

Editing by Shri Navaratnam

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