FOREX-Dollar drops, yuan slumps on COVID unrest in China

By Harry Robertson and Rae Wee

LONDON/SINGAPORE, Nov 28 (Reuters) -

The dollar fell sharply against Japan's yen on Monday as investors focused on rare protests in China, which pushed the yuan to a two-week low.

Protests have flared across China and spread to several cities in the wake of an apartment fire that killed 10 people in the city of Urumqi in the far west. Hundreds of demonstrators and police clashed in Shanghai on Sunday night.

China's onshore yuan finished the domestic session around 0.5% lower at 7.199 per dollar, the lowest close since Nov. 10. The offshore yuan fell to a more than two-week low in Asian trading and was last down 0.28% at 7.214.

The Australian dollar, often used as a proxy for the yuan, slid 0.67% to $0.671.

"We're really looking at the government response to what's happening ... the government response is so unpredictable, and of course that just means derisking," Chris Weston, head of research at Pepperstone, said.

Elsewhere in currency markets, the dollar was last down 0.69% to 138.18 yen. Earlier in the session it hit 137.57, its lowest level since Aug. 26.

The dollar also dropped against the euro, which was last up 0.69% to $1.048, around its highest level since late June.

On a day when investors are concerned about China, the drop in the safe-haven dollar was confusing, Chris Turner, head of market research at ING, said.

"With that uncertainty coming out of China you might understand that the yen is rising as a defensive trade," he added. "The thing that doesn't make sense is the decent rally in euro/dollar today."

The U.S. dollar has been softening over the past few weeks on hopes that the Federal Reserve would soon slow its pace of rate hikes - a view that was supported by minutes of the Fed's November meeting released last week.

The U.S. dollar index opened higher on Monday after closing on Friday at 106.05, but was last down 0.76% to 105.53.

Fed Chair Jerome Powell is due to speak on the outlook for the U.S. economy and the labour market at a Brookings Institution event on Wednesday, which could provide more clues on the outlook for U.S. monetary policy.

Stephen Gallo, European head of FX strategy at BMO Capital Markets, said a fall in U.S. bond yields was making the dollar less attractive versus the yen.

"Net-long dollar/yen remains one of the larger positions amongst FX leveraged funds, and these declines in appetite and longer-term yields may have spooked some investors," he said.

Global stocks fell, with analysts worried about the situation in China. China's stringent COVID restrictions have taken a heavy toll on its economy, and authorities have implemented various measures to revive growth.

"Companies (in China) are currently facing weaker retail sales from a higher number of COVID cases and falling home prices from unfinished home projects," Iris Pang, chief economist for Greater China at ING, said.

On Friday, the People's Bank of China (PBOC), the nation's central bank, said it would cut the reserve requirement ratio (RRR) for banks by 25 basis points (bps), effective from Dec. 5.

(Reporting by Harry Robertson and Rae Wee; Editing by Susan Fenton and Andrew Heavens)