The Japanese yen firmed against the dollar on Thursday after sources close to the White House told Reuters that a U.S.-China trade deal is unlikely this year, shattering investor hopes of a partial agreement soon and boosting safe-haven assets.
The Chinese yuan fell to a three-week low in onshore trade on concern that a failure to reach a deal to roll back U.S. tariffs could deal a fresh blow to China's stuttering economy.
Political tensions between Beijing and Washington also kept investors on edge after a source told Reuters that U.S. President Donald Trump is expected to sign into law two bills intended to support anti-government protesters in Hong Kong.
Hong Kong has been rocked by months of increasingly violent protest against Chinese rule of the former British colony. The passage of a U.S. law supporting the protesters could undermine efforts to secure a trade deal.
"The report from Reuters indicating that we might only see a trade deal next year has been driving some of the yen strength and that can also be seen as a source of some dollar strength," said Fritz Louw, a currency strategist at MUFG in London.
"If you see more negative trade headlines, and with the potential signing in the U.S. of the HK human rights bill, the yen should strengthen some more."
At 0825 GMT, the dollar was a tad weaker on the day at 108.54 yen.
Japan's currency has rallied almost 1% from more than five-month lows hit against the greenback earlier this month.
Completion of a "phase one" U.S.-China trade deal could slide into next year, trade experts and people close to the White House told Reuters on Wednesday, as Beijing presses for more extensive tariff rollbacks, and the Trump administration counters with heightened demands of its own.
The next date to watch is Dec. 15, when U.S. tariffs on some $156 billion in Chinese goods are scheduled to take effect.
Analysts said that while trade war headlines have tended to hurt the U.S. dollar in the past by boosting expectations for interest rates cuts, the dollar was now likely to benefit from any trade-related jitters in world markets given the Federal Reserve is seen on pause.
Minutes released on Wednesday showed that the Fed, which hit pause in its easing cycle following a rate cut in October, is in no hurry to reassess the path of interest rates.
The European Central Bank releases the minutes from its October meeting later this session but this was not expected to have a significant impact on the euro.
Elsewhere, China's yuan fell in the onshore market to 7.0450 versus the dollar, the weakest since Nov. 1, before steadying at 7.0372.
Offshore, the yuan slipped to 7.0533 per dollar, the lowest since Nov. 5, and then pared its losses.