The yen pulled ahead and the yuan fell against the dollar on Tuesday as the spread of a pneumonia-like virus in China sparked a sudden bout of risk aversion and sent Asian stocks skidding. The yuan slipped against the US currency in onshore and offshore trade after a Chinese health expert said the virus can pass from person to person as the fourth death from the illness was confirmed.
The outbreak of the disease, which has spread from the central city of Wuhan, is still in its early stages. However, it comes right before the peak travel season during the Lunar New Year holidays, raising risks that it could spread further.
"Hong Kong stocks fell sharply at the open due to worries about the virus, which sparked risk-off trades that pushed up the yen and US Treasuries," said Takuya Kanda, general manager of the research department at Gaitame.com Research Institute in Tokyo.
"So far, the number of deaths from the virus is low, so hopefully there will not be a big panic." The yen edged 0.2% higher to 109.97 per dollar on Tuesday. In the onshore market, the yuan fell to 6.8973 per dollar, the lowest level in almost a week. In the offshore market, it dropped to 6.9007. The dollar index against a basket of six major currencies stood at 97.589, near the highest level in a month.
The yen remained higher after the Bank of Japan kept its short-term interest rate target at minus 0.1% and its pledge to guide 10-year government bond yields around zero. The BOJ also nudged up its growth forecasts, but traders will scrutinise governor Haruhiko Kuroda's remarks at a press conference later on Tuesday.
Elsewhere in currencies, the Australian dollar fell 0.15% to $0.6865 as worries about the Chinese virus hurt currencies sensitive to risk. The New Zealand dollar also eased slightly to $0.6607. The euro was locked in a narrow range before a European Central Bank (ECB) meeting on Thursday where it is expected to launch a comprehensive review of central bank strategy, including the ECB's inflation target.
Against the dollar, the euro traded at $1.10968 The common currency was also quoted at 85.30 pence. The ECB's first meeting of the year is most likely to launch a rethink of an inflation goal the bank has failed to meet since 2013.
The scope and scale of the review will be a key focus for markets given the far-reaching impllications for monetary policy A slightly brighter tone to data means the ECB's assessment of the economic outlook will also be watched closely by investors on Thursday.
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