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Euro dips as Russia says won't annex other parts of Ukraine

A modest easing of geopolitical tension in Ukraine and a slight increase in U.S. Treasury yields took some premium away from the euro on Tuesday, sending it down against the U.S. dollar and the yen.

The Chinese yuan deepened its month of losses against the greenback on more signs of problems with a slowing economy and a heavily indebted corporate sector. The yuan's weakness was seen as a benefit for the yen, helping lift it against the greenback.

Market strategists pointed to comments by Russian President Vladimir Putin that he did not plan to seize other regions of Ukraine as a signal the crisis may not deepen. Putin signed a treaty on Tuesday making Crimea part of Russia, defying Ukrainian protests and Western sanctions.

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The euro dipped about 0.1 percent near $1.39, having briefly broken down to just under $1.39, but it essentially remained in a narrow trading range with a high on the day just above $1.39.

The crisis in Ukraine led to a sharp drop in Germany's ZEW survey of investor and analyst sentiment, contributing to early losses for the euro.

The dollar fell to 101.51 yen, a loss of almost 0.3 percent against the Japanese currency.

There was little impact on markets from U.S. consumer inflation data, which showed a slight rise of 0.1 percent, a muted increase despite rising food prices.

Yuan drop

Reversing one of the past decade's few sure bets in the foreign exchange market, the Chinese yuan is down around 2.5 percent in the past month. That move has resumed since officials widened the trading band for the currency over the weekend.

A survey of 970 global investors by Barclays showed that China's problems have replaced the U.S. Federal Reserve's reining in of monetary policy as the biggest concern for market players since the start of 2014.

The yuan weakened to less than 6.18 to the dollar versus Monday's close around 6.16.

There are differing schools of thought on the fallout for Japan of a weaker yuan. On the one hand it allows Japan's big manufacturers to invest more cheaply in producing cars and electronics in China, while the competitive advantage of those factories also grows. Profits can then flow back into Japan.

On the other hand, a generally weaker Chinese economy poses problems for Japan given China's importance as a market for Japanese products and investment.

Dealers say that many of those who were betting strongly at the start of this year on further gains for the yuan are still to be shaken out, and that the currency could go much lower.

The main barrier to that is the People's Bank of China itself, which has kept its reference rate for the yuan around 6.13 for a week, encouraging speculation it may defend the top end of its newly widened 2 percent band around 6.25 per dollar.

The yuan - which is not fully convertible internationally and trades in a complicated system of "offshore" and Chinese "onshore" rates - was 0.5 percent lower against its Japanese counterpart around 16.43.

—By Reuters

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