* Dollar/yuan falls sharply, dragging down dollar broadly
* Dollar slips on profit-taking ahead of Trump inauguration
* Some see 'Trump rally' ending, others expect longer leg
By Hideyuki Sano
TOKYO, Jan 5 The dollar stepped further away
from a 14-year peak against a basket of major currencies on
Thursday as market players were spooked by sharp falls in the
dollar against the Chinese yuan.
The yuan rose sharply for two days in a row to hit near
two-month highs, wrong-footing speculators that had bet on the
yuan weakening further due to capital outflows from China.
Unexpectedly big falls in the dollar against the yuan had
knock-on effects on the dollar against major currencies, such as
the yen and the euro, as traders rushed to cut back their bets
on the dollar there as well.
"It's not clear exactly how the yuan's strength should help
other major currencies against the dollar. Yet, considering that
the renminbi had been a major piece of the puzzle in the
dollar's strength, a reversal in the dollar/yuan tends to dampen
momentum for overall buying in the dollar," said a senior
currency trader at a major Japanese bank.
The dollar's index against a basket of six major currencies
slipped to as low as 101.86, a three-week low,
just two days after it had hit a 14-year high of 103.82 on
Tuesday, when a strong reading from a U.S. manufacturing survey
boosted the greenback.
The euro rose as much as 0.7 percent in Asia to
$1.0563, extending its recovery from a 14-year low of $1.0340
touched on Tuesday.
The dollar slipped almost one percent at one point to 116.08
yen, though it has so far managed to stay above its Dec.
30 low of 116.05.
The dollar's retreat also came as investors locked in gains
from its two-month-old rally after Donald Trump won the U.S.
The dollar had soared on Trump's plans to cut taxes, boost
fiscal spending and protectionist trade rhetoric, all seen as
inflationary and lifting U.S. bond yields.
But uncertainty on exactly what his presidency will bring is
prompting some players to close their bets on the dollar ahead
of Trump's planned news conference on Jan. 11. He will be
inaugurated on Jan. 20.
"Some people say the 'Trump rally' has come to an end
already. Others say the real rally will begin after he takes
office," said Kyosuke Suzuki, director of forex at Societe
Generale. "It's not clear what the market's next theme will be."
"Recent economic data is pretty good so markets are on
risk-on mode overall and the dollar is supported. But U.S. bond
yields are being capped so the dollar is losing its drive for
further gains," said Yukio Ishizuki, currency strategist at
U.S. bond yields edged down on Wednesday, with the 30-year
yield hitting a four-week low, even as the minutes from the
Federal Reserve's December policy meeting showed almost all
policymakers thought the economy could grow more quickly because
of fiscal stimulus under the Trump administration.
The Chinese yuan rose more than one percent to a high of
6.7989 to the dollar in offshore trade a day after
Chinese authorities tried to shore up the currency with higher a
mid-point and intervention by state-owned banks.
Although Beijing set the mid-point for the daily trading
range in line with market expectations on Thursday,
short-covering in the yuan continued.
"There had been speculation that China plans to weaken the
yuan against the dollar after the change in its currency basket
at the end of last year. But the exact opposite has happened and
I'd guess the Chinese policy-makers didn't want a one-sided
market," said Daisuke Uno, chief strategist at Sumitomo Mitsui
Separately, a private survey on China's services sector
showed growth in the industries accelerated to a 17-month high
in December, underpinning risk sentiment.
The Australian dollar hit a two-week high of
(Editing by Richard Borsuk and Simon Cameron-Moore)