© Reuters. A U.S. Dollar banknote

By Stanley White

TOKYO (Reuters) – The dollar was hemmed into narrow ranges against most currencies on Tuesday as renewed concerns about diplomatic tension between the United States and China and rising coronavirus cases put a dent in risk appetite.

The euro held onto gains against the greenback and the pound as investors await data on German investor sentiment to help gauge the pace of Europe’s recovery from the health crisis.

Currency trading has thinned out as a recent resurgence of novel coronavirus infections has caused some areas to place new restrictions on business activity.

Markets now face an additional threat from tit-for-tat retaliation between Washington and Beijing over access to U.S. financial markets, civil liberties in Hong Kong, and territorial claims in the South China Sea.

“The focus has shifted to whether or not the next round of coronavirus lockdowns will be large enough to damage economic growth,” said Junichi Ishikawa, senior foreign exchange strategist at IG Securities .

“The Hong Kong problem could potentially lead to new trade friction. Negative developments on either front could cause stocks to adjust lower, and drive some safe-haven flows to the dollar and the yen.”

The dollar stood at 107.35 yen on Tuesday in Asia following a 0.4% gain in the previous session.

The dollar traded at 0.9419 Swiss franc after eking out three consecutive sessions of narrow gains.

The euro was quoted at $1.1346, resting below a one-month high reached on Monday. The common currency traded at 90.36 pence, holding onto a 0.9% gain from the previous session.

The United States and China are waging diplomatic battles on several fronts that have the potential to unsettle financial markets.

U.S. President Donald Trump’s administration plans to soon scrap a 2013 agreement between U.S. and Chinese auditing authorities, a senior State Department official told Reuters.

This move could foreshadow a broader crackdown on Chinese firms listed on U.S. stock markets that are under fire for sidestepping U.S. disclosure rules.

In addition, the United States has hardened its stance against China’s claims in the South China Sea and is taking steps to end Hong Kong’s special legal status in protest against Beijing’s security law for the former British colony.

The opening of onshore trade in the yuan will be closely scrutinised on Tuesday to see if China’s currency can continue its recent rally.

However, traders are likely to avoid big positions before the release this week of data on Chinese gross domestic product, retail sales, industrial output, and exports.

Demand for riskier assets is likely to take a hit after California, the most populous U.S. state, placed new restrictions on businesses as coronavirus cases and hospitalizations soared.

Elsewhere in currencies, the Australian dollar was little changed at $0.6935. Sentiment for the has taken a hit as some Australian states also re-impose coronavirus restrictions.

The New Zealand dollar fell slightly to $0.6530.

The Antipodean currencies are considered barometers of risk because of their close ties to commodities and China’s economy.

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