NEW YORK (Reuters) - The Chinese yuan strengthened and demand for safe-haven currencies like the Japanese yen and Swiss franc eased on Tuesday, as China appeared to take steps to stabilize its currency which breached a key level on Monday and sparked broad risk aversion.
The dollar rebounded after falling the previous session, benefiting from relative calm in the market.
Stocks and emerging market currencies plunged on Monday and safe havens jumped after China authorities allowed the yuan to break through the psychologically important level of 7 per dollar, its lowest since the 2008 financial crisis.
Risk appetite, however, improved on Tuesday after the People’s Bank of China fixed the daily reference rate for the onshore Chinese yuan at 6.9683, firmer than the expected 6.9871, and below the key 7 rate.
The central bank also said it was selling yuan-denominated bills in Hong Kong, a move seen as curtailing short selling of the currency.
“Beijing’s move today to set a stronger exchange rate for the yuan helped stabilize markets,” said Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington. “Still, the market bias remains fraught with nerves, boding well for haven assets.”
Onshore yuan CNY= stayed above 7, but gained 0.3% against the dollar, which fell to 7.023 yuan, after rising as high as 7.0575 overnight.
The offshore yuan CNH= was also up, rising 0.6% against the dollar.
Escalating tensions between the United States and China are likely to keep investors cautious with no end in sight to the trade conflict between the world’s two largest economies.
That tension increased after the U.S. Treasury department announced late on Monday it had determined for the first time since 1994 that China was manipulating its currency and said that Washington would engage the International Monetary Fund to clamp down on Beijing.
China’s central bank responded on Tuesday that China “has not used and will not use the exchange rate as a tool to deal with trade disputes.”
In other currencies, the dollar rose 0.1% against a basket of currencies to 97.645 .DXY, climbing from two-week lows hit after the yuan’s fall on Monday.
It recovered as well from Monday's seven-month low against the safe-haven yen. In afternoon trading, the dollar was last at 106.56 yen JPY=, up 0.6%.
The dollars recouped losses against the euro, which slipped 0.1% to $1.1193 EUR=.
Yield spreads have narrowed in favor of the euro, with the single European currency at an advantage as market participants repriced the risk of additional easing from the Federal Reserve, Scotiabank said in a research note.
Reporting by Karen Brettell and Gertrude Chavez-Dreyfuss; Editing by Richard Chang