May 7, 2019 / 10:56 AM / a month ago

FOREX-China's yuan struggles near 2-1/2 month low after Trump's trade threats

* Despite Trump tariffs threat, FX markets broadly calm

* Aussie rallies as central bank dashes rate cut hopes

* Graphic: World FX rates in 2019 tmsnrt.rs/2egbfVh (Adds graphic)

By Tommy Wilkes

LONDON, May 7 (Reuters) - The Chinese offshore yuan remained hobbled near 2-1/2 month lows on Tuesday after U.S. President Donald Trump’s threat of additional tariffs on Chinese goods rattled traders, although broader currency markets were largely stable.

Foreign exchange traders have not panicked about the prospect of a breakdown in negotiations between China and the United States to resolve their trade conflict, and the moves on Tuesday were small following a bout of nerves at the start of the week.

Trump tweeted on Sunday that he would raise tariffs on $200 billion worth of Chinese goods to 25 percent from 10 percent by the end of the week and would “soon” target the remaining Chinese imports with tariffs.

But top Chinese negotiator Vice Premier Liu will head to Washington this week for talks, and some investors have interpreted Trump’s threat as a negotiating tactic.

“As long as the talks continue, the market will remain relaxed...that there will be a deal after all,” said Esther Reichelt, curency analyst at Commerzbank.

The offshore yuan on Monday had been on course for its worst daily drop in 10 months, briefly touching a four-month low of 6.8218, but it later recovered some of those losses while remaining under pressure.

It was down 0.1 percent at 6.7833 yuan per dollar by 1030 GMT, its weakest since Feb. 19.

The recovery in investor sentiment on Tuesday was fragile, with gains in stock markets small and the safe-haven yen up 0.1 percent to 110.61. The Japanese currency had briefly touched five-week highs of 110.285 on Monday.

The U.S. dollar was flat. The index - which measures the greenback against a basket of currencies - stood at 97.528 .

AUSSIE BOUNCE

The Australian dollar surged as much as 0.8 percent to $0.7048 after the country’s central bank held interest rates at a record low, dashing speculation it might ease policy following a weaker-than-expected reading of inflation.

Central banks across the globe have turned increasingly dovish in 2019, raising expectations that policymakers would ease monetary conditions.

“Today’s position from the RBA marks a correction to the recent trend in G10 FX, where expectations of policy normalisation have been scaled back and fresh easing (particularly in Australia and New Zealand) has been priced in,” ING analysts said in a note.

Australia’s central bank, however, signalled future cuts should the unemployment rate fail to fall.

The euro hovered around $1.12.

Sweden’s crown increased after central bank board members said weak inflation did not justify a complete rethink of policy, according to minutes from the Riksbank’s April meeting. The crown rose as much as 0.3 percent to 10.6875 per euro .

Sterling slipped 0.1 percent to $1.3084 as investors remained cautious about talks between the Conservative and Labour parties to agree a Brexit deal.

Editing by Kirsten Donovan/Mark Heinrich

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