The U.S. dollar was flat against most major currencies on Monday but lost ground to the Japanese yen after U.S. President Donald Trump said he would sharply raise tariffs on Chinese goods this week, risking the derailment of trade talks between Washington and Beijing.
Trump on Monday slammed China over its trade practices, saying the United States was losing billions on trade with China. The comments followed his weekend threat to ratchet up tariffs on $200 billion worth of imports from China, even as ongoing talks between Washington and Beijing as were set to continue this week.
On Friday, Trump had cited progress in trade talks and praised his relationship with Chinese President Xi Jinping.
"After weeks of talks and suggestions from the U.S. administration that a deal was close, the sudden ramping up of trade tensions caught investors by surprise," Shaun Osborne, chief FX strategist at Scotiabank in Toronto, said in a note.
"The FX markets are reacting in a classic risk-off manner, with the USD trading mainly higher," he said.
The dollar index, which measures the U.S. currency versus a basket of six major rivals, was up 0.01%.
Increased trade tensions between Washington and Beijing have generally been supportive of the dollar as investors view the United States to be in better shape than its rivals to weather a trade war.
Against the Japanese yen, which tends to benefit during geopolitical or financial stress as Japan is the worlds biggest creditor nation, the dollar fell 0.15% to 110.92 . The greenback dipped to a five-week low of 110.29 earlier in the session.
"USDJPY has broken the key 110.70 level and a close below here is technical bearish for the pair," Morgan Stanley analysts said in a note.
"A risk to the trade is that trade rhetoric becomes less escalatory, generating a reversal in price action, supporting risk, and pushing USDJPY higher," they said.
Asian currencies were largely weaker with the Chinese yuan slipping almost 1% to near its lowest levels this year, around 6.80 per dollar. Both the Mexican peso and the Turkish lira fell against the U.s. currency.
Other currencies whose fortunes are linked to the Chinese economy such as the and the New Zealand dollar, declined about 0.5% each.
Sterling declined 0.54% and reversed some of Friday's gains, after opposition Labour Party accused Prime Minister Theresa May of leaking details of the compromise under discussion and jeopardizing talks.