The dollar rose more than half a percent against both the euro and yen on Friday as measures taken by China to ease this week's market turmoil helped steady investors' nerves over market moves there and their influence on global financial stability. The yuan, down by up to 3 percent in offshore trading this week, steadied, with dealers reporting both outright intervention by China through state-owned banks and temporary bans on Chinese banks selling dollars.
The Australian and New Zealand dollars, perceived as the major currencies most dependent on China's economic and financial prospects, were also both solidly higher, recovering some of this week's more than 3 percent slide. "Its all just about what happens in China. That's the obsession at the moment," said Derek Halpenny, European Head of Global Markets Research at Bank of Tokyo-Mitsubishi UFJ in London.
"Given what's taken place there today we are back in risk on mode and looking to the (US) jobs report this afternoon. But I'm pretty sure next week we'll get some more days like we have seen since the start of the year." The dollar was up 0.6 percent at 118.33 yen, pulling away from a 4-1/2-month low of 117.33 struck overnight as the region's equity markets bounced after a brutal week. Against the euro, it gained 0.5 percent to $1.0861.
The yuan's tumble this week on both onshore and offshore markets has sent currency investors scrambling for traditional safe havens like the yen, Swiss franc and to a lesser extent the euro. The yuan was fixed higher by the PBOC for the first time in nine days on Friday. In the background there are also question marks over whether another bout of turbulence from China, accompanied by a broader "hard landing" for the economy, could stay the US Federal Reserve's hand on further rises in interest rates this year. Expectations the Fed will follow up December's first quarter-point hike in almost a decade are at the heart of most banks' trading recommendations - chiefly for a weaker euro - this year. A strong US nonfarm payrolls report on Friday would bolster expectations of more rate rises.
"The biggest impact on markets is if the number is very soft, <150k and negative revisions," said Steven Englander, head of currency strategy at Citi in New York. "Global pessimism would be the dominant result, even if the Fed rate path is lowered somewhat. (I) would see it as triggering another round of risk off, so a weaker dollar versus the yen, and maybe European currencies."
The greenback was still poised to lose 1.6 percent against the yen this week but is broadly flat against both the euro and a basket of currencies. The main issue for markets remains to what extent the yuan may weaken further. Sources told Reuters that China's central bank is under increasing pressure from policy advisers to let the yuan fall quickly and sharply, potentially by another 10-15 percent.
"Managing a stable USD/CNY, monetary policy autonomy, and an open capital account simultaneously will be an extremely difficult outcome to achieve, unless China is prepared to expend more FX reserves," strategists at Barclays wrote. "There are already signs that China's resistance to CNY depreciation is fading."
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