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TOKYO: The dollar remained on the front foot in Asia on Wednesday, holding on to overnight gains against major peers as investors sought the safety of the currency amid risks from a floundering Chinese economy and downgrades for US banks.

The risk-sensitive Australian and New Zealand dollars wallowed near multi-month lows.

The Chinese yuan, however, got some respite after the central bank set a stronger official rate than expected, signalling its discomfort with recent declines.

The US dollar index - which measures the currency against the euro, yen and four other counterparts - was little changed at 102.50 in the Asian morning, following a 0.47% rise in the previous session.

Worries about the global economy flared again after data on Tuesday showed Chinese imports and exports contracting faster than expected in July.

Data on Wednesday showed China’s consumer prices fell for the first time in more than two years in July, fanning deflation fears, although the decline of 0.3% was slightly less than forecast in a Reuters poll.

Concerns about US banks added to the risk-averse sentiment, after Moody’s cut credit ratings of several small to mid-sized US banks and said it may downgrade some of the nation’s biggest lenders, including Bank of New York Mellon and US Bancorp.

Rome also caused a commotion by setting a one-off 40% tax on Italian bank profits. US Treasuries also saw a surge in demand from haven-seeking investors, with 10-year yields briefly dipping back below 4%.

“In a different set of circumstances, I would have looked at the 10-year yield below 4% and said the dollar should be lower, but it just speaks to the risk-off environment we’re in,” said Ray Attrill, head of foreign-exchange strategy at National Australia Bank.

In China, “there’s still no signs yet from officialdom of imminent support” for the economy, despite the “protest of sorts against the recent run-up in the dollar-yuan rate” implicit in the strong yuan fixing, Attrill said.

The dollar eased 0.12% to 7.2274 yuan in offshore trading after the People’s Bank of China set the midpoint rate for onshore trading at 7.1588, much stronger than the Reuters estimate of 7.2198.

The Aussie, which often acts as a proxy for China’s economic outlook, was about flat at $0.6543, after dipping on Tuesday to the lowest since June 1 at $0.6497.

New Zealand’s kiwi slipped 0.16% to $0.6054, edging back towards the previous session’s two-month low of $0.6035.

The US dollar was firm despite some more dovish signals coming from Federal Reserve officials overnight, with Philadelphia Fed President Patrick Harker suggesting interest rates are high enough already, echoing the view of Atlanta Fed President Raphael Bostic.

The message has been far from uniform though, with Fed Governor Michelle Bowman saying on Monday that further hikes are likely.

“We’re starting to get trickles of more dovish commentary from Fed officials, and you start to think, OK, the thinking is really starting to shift,” said Bart Wakabayashi, Tokyo branch manager at State Street Bank and Trust.

“I don’t know if it’s a turning point, but it really throws a wrench into the next meeting.”

Money market traders still heavily favour a quarter point rate increase at the next policy meeting in September, laying odds of 86.5%.

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