China’s Yuan Shock Boosts Dollar, Euro Amid Flight to Safety

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China’s devaluation of the yuan benefited the dollar and the euro as investors retreated to haven assets.

A gauge of the dollar traded near the highest closing level in almost a week. The euro held a five-day gain as Greece reached an accord with creditors on the terms of a third bailout, restoring the shared currency’s appeal. Australia’s dollar rebounded before reports on consumer confidence and wages Wednesday.

“The FX market is worried that, despite China’s real appreciation this year, that CNY weakness from here would lead to competitive depreciation in trade competing countries,” Emma Lawson, senior currency strategist at National Australia Bank Ltd. in Sydney, wrote in a note to clients. “In that case, some countries would inevitably have relatively stronger currencies - - and tighter financial conditions.”

The Bloomberg Dollar Spot Index was little changed at 1,213.32 at 8:48 a.m. in Tokyo after jumping 0.5 percent to 1,213.51, the highest level on a closing basis since Aug. 6.

The greenback slipped 0.1 percent to 73.11 U.S. cents per Australian dollar after strengthening 1.5 percent to 73.04 cents in New York. The U.S. currency fell 0.2 percent to 65.52 U.S. cents against New Zealand’s dollar after surging 1.3 percent on Tuesday.

The euro was at $1.1041, after climbing 0.2 percent to $1.1042 Tuesday, when it surged at least 1.5 percent versus the Aussie and kiwi dollars.

Safety Bid

The dollar and euro rallied as investors fled China-exposed markets for the relative safety of U.S. and European government debt. A rally in 10-year Treasuries sent yields down to levels unseen in more than two months, while those on Australian notes fell Wednesday to a one-week low of 2.71 percent. Stocks tumbled around the globe.

“We’re certainly seeing it hit the much more China-sensitive currencies, like Australia, like New Zealand,” said Matt Derr, a foreign-exchange strategist at Credit Suisse Group AG in New York. “It’s just more risk off broadly, so euro’s getting a bit of a bid and equities are getting smoked.”

China’s central bank cut its daily reference rate for the yuan by 1.9 percent on Tuesday, triggering the yuan’s biggest one-day drop since the nation ended its dual-currency system in January 1994. The change is a one-time correction, a spokesman for the People’s Bank of China said.

“China’s capital outflows are a concern to China, but could be a boon to other emerging markets or even the U.S. as more money is earmarked for U.S. debt,” Alfonso Esparza, a senior currency analyst at Oanda Corp. in Toronto, said by e-mail.