The U.S. dollar gained on Monday, bolstered by safe-haven flows as risk appetite waned amid fears that last year's U.S.-China dispute will be reignited, this time over the novel coronavirus.
U.S. President Donald Trump and Secretary of State Mike Pompeo have pinned the blame for the pandemic on China, where the coronavirus outbreak is believed to have originated.
The latest salvo came on Sunday from Pompeo, who said there was "a significant amount of evidence" that the virus emerged from a laboratory in the central Chinese city of Wuhan.
Analysts were debating how the United States might seek to retaliate, with more trade tariffs or canceling the payments on U.S. Treasuries that China owns.
They all agreed the FX market overall would see higher volatility. Erik Bregar, head of FX strategy at Exchange Bank of Canada, said he is closely watching for signs "of a U.S.-China Trade War 2.0 and the possibility for another U.S. dollar funding squeeze."
In afternoon trading, the dollar index was up 0.3% at 99.529, rising for a second straight day.
The dollar also extended gains after data showed new orders for U.S.-made goods fell more than expected in March, dropping 10.3%. Economists polled by Reuters had forecast factory orders tumbling 9.7% in March.
The euro fell 0.7% to $1.0907, while sterling slid 0.3% to $1.2441.
"Many investors are getting skeptical about the rebound we saw in risk appetite since the March 23rd low in stocks," said Ed Moya, senior market analyst at OANDA in New York. "You'll see investors become extremely conservative and we'll see a steady stream of safe-haven flows, which should benefit the dollar."
With U.S.-China tension brewing, the Chinese yuan fell to a six-week low of 7.1555 against the dollar in the offshore market. The dollar was last little changed at 7.1334, but if the yuan falls again, the next levels to watch would be the mid-March low of 7.1651 and early-September trough of 7.1975.
Dollar liquidity in the euro and yen FX swap market also showed a little more pressure on Monday, after weeks of steady U.S. currency supply that suggested less of a funding squeeze.
The euro/dollar three-month swaps widened on Monday to -50 basis points, after hitting a premium of 60 basis points in favor of the euro in early April.
The yen/dollar three-month swaps also widened to about -9.250 basis points, after hitting positive premiums in favor of the Japanese currency early last month.
The numbers suggested that exchanging the yen and euro to U.S. dollars is getting a little more expensive in the swap compared to rates seen last month.
The dollar, however, fell against the yen, another safe-haven currency, trading 0.2% lower at 106.72 yen.