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FOREX-Yuan leads losers as global risk appetite sours

Saikat Chatterjee

* Graphic: World FX rates in 2019 http://tmsnrt.rs/2egbfVh

LONDON, May 6 (Reuters) - The Chinese yuan was set for its biggest drop in 10 months on Monday after U.S. President Donald Trump threatened to raise tariffs on China while perceived safe-haven currencies such as the yen surged amid a broad-based rout for risky assets.

In a surprise twist, Trump said he would hike U.S. tariffs on $200 billion worth of Chinese goods this week and target hundreds of billions more soon, marking a big shift in tone from him. Trum had cited good progress in trade talks and praised his relationship with Chinese President Xi Jinping.

That caught markets off guard, especially coming during a time of low market volatility across asset classes and a recent swathe of economic data that has indicated tepid but steady expansion of the global economy.

"This has the potential to upset the global risk applecart especially after the recent calm in markets," said Ulrich Leuchtmann, head of FX & EM research at Commerzbank in Frankfurt.

The Chinese currency led losers, falling nearly a percent to near its lowest levels this year around the 6.80 per dollar line. Both the Mexican peso and the Turkish lira fell by more than half a percent each.

Other currencies, whose fortunes are closely linked to the Chinese economy, such as the Australian dollar and the New Zealand dollar, declined between 0.3 to 0.5 percent.

The selloff wasn't limited to currencies alone, with a gauge of European equities down nearly 2 percent in early trading.

Moves were exaggerated with London markets out for a local holiday while Japanese markets remained shut.

"An increase in tariffs would be bad news for risk assets and would threaten the prospect of a global growth recovery," said Rodrigo Catril, a senior FX strategist at NAB.

Away from the weakness in the Chinese yuan and other emerging market currencies such as the Turkish lira, the dollar was broadly stable against a basket of currencies.

Investors weighed the prospects of a likely inflationary boost to the U.S. economy if Trump pressed ahead with higher tariffs on imported goods coinciding with growing expectations of a U.S. interest rate later in the year.

(Reporting by Saikat Chatterjee with additional reporting by Wayne Cole in Sydney Editing by Mark Heinrich)