FOREX-Evergrande worries drag risk FX lower, dollar catches safety bid

·3 min read

* Yuan skids from 3-mth highs to 3-wk lows on Evergrande worries

* Dollar index at 4-week high on safety bid

* Risk/commodity FX hit

By Ritvik Carvalho

LONDON, Sept 20 (Reuters) - The offshore Chinese yuan skidded to three-week lows on Monday, dragging lower other risk and commodity currencies, while the safe haven dollar rose as worries about Chinese property developer Evergrande's solvency spooked financial markets.

Only on Friday, the yuan hit its highest level in three months at 6.4297 per dollar. The sharp slump in the currency on Monday came on the back of warnings from Chinese regulators that Evergrande's insolvency could spark broader risks in the country's financial system if not stabilised.

Evergrande has been scrambling to raise funds to pay its many lenders, suppliers and investors. A deadline for the company to make an interest payment to creditors looms this week.

The move in the yuan, which saw it fall to 6.4698 yuan per dollar - its lowest since August 31 - also dragged on the Australian dollar, New Zealand dollar, and Norwegian crown, which all hit levels at or near three-week lows.

The Japanese yen strengthened 0.2% to 109.72 yen per dollar , although that was not enough to stop the dollar index benefiting from a safety bid.

Against a basket of peers, the greenback was up almost 0.2% on the day and at its highest in four weeks. Across the Atlantic, the euro was 0.15% lower on the day at $1.1707 by 0806 GMT.

"FX markets start the week on a nervous footing, where the biggest threats are faced from the travails of Chinese real estate developer Evergrande and Wednesday's FOMC (Federal Open Markets Committee) meeting," said Francesco Pesole, G10 FX strategist at ING.

"Today also sees a tight Canadian election, where a failure to get a clear result may not help a CAD already under pressure as the commodity complex feels the strain."

The Canadian dollar, also a commodity currency that correlates with risk sentiment, hit its lowest in four weeks at C$1.2815 per dollar.

Polling for Monday's national election in Canada points to an advantage for incumbent Prime Minister Justin Trudeau but a likelihood that he remains leader of a minority government.

CENTRAL BANK FOCUS

Ahead this week, no fewer than a dozen central banks hold meetings, but traders' top focus is on the Fed where expectations for a tapering signal are keeping the dollar bid.

The Fed concludes a two-day meeting on Wednesday and consensus is that it will stick with broad plans for tapering this year but will hold off providing details or a timeline for at least a month.

Creeping U.S. yields, however, which at the 10-year tenor rose for a fourth straight week last week, point to risks of a hawkish surprise or a shift in projections to show hikes as soon a 2022, both of which could support the dollar.

"We suspect the Fed may be mildly hawkish in the sense that ... (it) is likely to raise its 'dots' signalling one rate hike next year and for PMIs to continue a tad lower. If so, euro/dollar will probably finish the week lower too," said Mikael Olai Milhøj, chief analyst at Danske Bank.

Among the other major central banks, the Bank of England is expected to leave policy settings unchanged, but traders see potential for gains in the pound if the bank adopts a hawkish tone or more members call for asset purchase tapering.

There is no expectation of policy shifts at the resolutely dovish Bank of Japan on Wednesday, but a day later Norway's Norges Bank is expected to become the first G10 central bank to lift rates.

Cryptocurrencies fell, with Bitcoin down over 5% at one point at $44,773.

(Reporting by Ritvik Carvalho Editing by Gareth Jones)

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