The yen strengthened versus its peers on Tuesday, as investors took refuge in safe-haven assets after the US Justice Department charged China's Huawei Technologies Co Ltd with fraud, ratcheting up US-Sino trade tensions. The United States on Monday charged Huawei, its chief financial officer and two affiliates with bank and wire fraud to violate sanctions against Iran in a case that has escalated tensions with Beijing.
Investors fear the charges could complicate high-level trade talks set to begin on Wednesday when China's Vice Premier Liu He will meet with US Trade Representative Robert Lighthizer and others. "There is a much lesser chance now that we get anything positive out of these trade negotiations," said Nick Twidale, chief operating officer at Rakuten Securities.
"This is likely to be bad for risky assets such as stocks and we expect the dollar/yen and Australian dollar to be under pressure," Twidale said.
China expressed serious concern about US charges on Huawei, with its foreign ministry saying on Tuesday that Beijing would protect the lawful interests of Chinese companies.
The yen, a currency sought out during times of market uncertainty or economic stress, advanced 0.15 percent versus the greenback to 109.19.
Against the Aussie dollar, the yen was up 0.2 percent at 78.18. The euro also lost 0.1 percent of its value versus the Japanese currency to 124.80 as investors took shelter in the safe-haven currency.
The Aussie dollar was down 0.1 percent at $0.7155, but well off its intra-day low after the Reserve Bank of Australia (RBA) board member Ian Harper said that the next move in Australian rates would be up.
The dollar index, a gauge of its value versus six major peers, was flat at 95.72 and holding close to a two-week low at 0314 GMT.
Market participants are focusing on the Federal Open Market Committee policy meeting between Jan. 29-30, where Chairman Jerome Powell is widely expected to acknowledge growing risks to the US economy as global momentum weakens.
Investors expect the Fed to adopt a more cautious stance on policy than they did in 2018, pressured by signs of a peak in US corporate earnings and the loss of economic momentum both at home and globally.
The interest rate futures market is pricing in no Fed hikes this year. Last year, the dollar enjoyed a solid rally as the US central bank raised rates four times because of a robust economy.
Elsewhere, the euro was a bit weaker at $1.1427, but not far off its highest level in more than a week. Traders believe recent weak economic readings in Germany and France, and the European Central Bank's dovish stance, are already priced into the euro.
Sterling was also slightly down 0.1 percent at $1.3150, pulling back from 3-month highs. Later on Tuesday, lawmakers will debate and vote on British Prime Minister Theresa May's next steps, after the overwhelming rejection of her Brexit plan earlier this month, and have been proposing amendments seeking to shape the future direction of Brexit.
Analysts expect sterling to remain volatile. Britain is set to leave the European Union on March 29, but the country's members of parliament remain far from agreeing a divorce deal.
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