* China tells U.S. to close Chengdu consulate
* Yen gains, AUD and NZD retreat from recent peaks
* Strong euro has dollar headed for largest weekly drop since June
* Graphic: World FX rates in 2020 tmsnrt.rs/2RBWI5E
By Tom Westbrook
SINGAPORE, July 24 (Reuters) - A slide in the dollar paused and the safe-haven yen rose to a one-month high on Friday, as Sino-U.S. tensions escalated after China ordered the United States to shut its Chengdu consulate in retaliation for the closure of its consulate in Texas.
The soaring euro was steadfast, but anxious investors pushed the Australian and New Zealand dollars from multi-month peaks, roused the languid yen from its recent range and had the yuan under pressure at a two-week low. Equities also fell.
China’s foreign ministry said it told the U.S. embassy on Friday morning to close its consulate in the southwestern city of Chengdu, days after Washington abruptly ordered the closure of the Chinese consulate in Houston.
Earlier on Thursday U.S. Secretary of State Mike Pompeo cast Sino-U.S. relations in starkly confrontational terms.
“If we bend the knee now, our children’s children may be at the mercy of the Chinese Communist Party, whose actions are the primary challenge today in the free world,” he said. While Asian trading volumes were lightened by a public holiday in Japan, the escalating tensions lifted the yen to 106.38 per dollar, its strongest since late June.
“The market is taking it as a rise in tension...but it’s an in-kind reaction rather than a provocative action,” said Moh Siong Sim, FX analyst at the Bank of Singapore
“So there is this moment of nervousness. But if it stops here, the market will get used to the idea that we’ll have a lot of tough talk but stop short of outright escalation into the tariff arena.”
The Australian dollar was down a fifth of one percent on the session at $0.7086. It is ahead 1.3% for the week, but almost a cent below a 15-month high hit on Wednesday.
The New Zealand dollar was at $0.6625, just under a 7-month high of $0.6690 touched on Thursday.
The safe-haven Swiss franc also hit a four-month peak of 0.9239 per dollar. Weaker-than-expected U.S. employment data had rattled U.S. markets overnight.
Sino-U.S. ties have deteriorated over issues ranging from the COVD-19 pandemic, which began in China, to Beijing trade and business practices, its territorial claims in the South China Sea and its clampdown on Hong Kong.
Markets have so far been relieved that no flashpoint has yet prompted either side to abandon the trade deal, but are beginning to view it as a real risk.
The Chinese yuan, a barometer of Sino-U.S. tensions, looks set for its worst week in two months. It last sat at 7.0206 per dollar.
Other trade-exposed Asian currencies from the South Korean won to the Thai baht were also gently pressured.
Elsewhere the tearaway euro remained a tower of strength since busting through chart resistance in the afterglow of Europe’s leaders agreeing on a coronavirus rescue package.
It has gained 1.5% this week, its best since late June, and 3.3% for the month so far to sit at $1.1601, just below a 21-month high hit overnight.
Sterling hung on to early-week gains at $1.2733.
Besides Sino-U.S. tension, investors are looking to a slew of Purchasing Managers Index figures due across Europe and the U.S. later on Friday for a read on economic recovery progress.
Focus is also on the next U.S. fiscal rescue package, which is deadlocked in Congress while a month-end deadline looms as some unemployment benefits are due to expire.
“The concern is that a failure to get this away will impact consumer sentiment at a time when U.S. data is starting to miss the mark,” said Chris Weston, head of research at Melbourne brokerage Pepperstone. (Reporting by Tom Westbrook Editing by Shri Navaratnam)