* Graphic: World FX rates in 2019 http://tmsnrt.rs/2egbfVh
* Tussle over China currency policy rattles markets
* Markets calm but sentiment remains fragile
* Kiwi falls after RBNZ cuts rates more than expected (Adds details on yuan midpoint, intervention in forwards, RBNZ)
By Stanley White
TOKYO, Aug 7 (Reuters) – The dollar fell against the yen and the yuan weakened, in a sign investors remain wary that China’s currency policy has become a new flashpoint in its trade war with the United States.
The yuan eased against the dollar in offshore trade on Wednesday after the People’s Bank of China set its official midpoint not much firmer than its previous close.
China’s currency also opened weaker against the dollar in onshore trade.
The world’s two-largest economies are locked in a bitter trade dispute that rapidly escalated late last week when U.S. President Donald Trump said he would impose more tariffs on Chinese goods.
China responded on Monday by allowing its currency to weaken past the psychologically important line of 7 per dollar, which immediately prompted Washington to label Beijing a currency manipulator.
Market sentiment has deteriorated rapidly as a result, which would support the safe-haven yen and hasten yuan declines as there appears to be no quick resolution to the U.S.-Sino conflict.
Risk sentiment took a further hit after the Reserve Bank of New Zealand stunned traders by cutting interest rates more than expected, highlighting the growing concern policymakers have about the global economy.
“Escalation of U.S.-China trade frictions has deteriorated market sentiment, which will eventually make Treasury yields go lower and the yen go higher,” said Tohru Sasaki, head of Japan markets research at JP Morgan Securities in Tokyo.
“We still expect the dollar to rise to 7.35 yuan by the end of the year, which will make the U.S. administration very uncomfortable. I expect the dollar to fall to 104-103 yen by the end of the year.”
The dollar fell 0.3% to 106.13 yen in Asian trading. On Tuesday, the greenback rallied from a low of 105.51 yen to as high as 107.07 yen in a volatile session sparked by worries about China’s currency policy.
Revived concerns about trade frictions tend to push demand for the safe-haven yen higher.
The offshore yuan fell to 7.0701 per dollar, not far from 7.1397, the lowest since international trading in the currency began in 2010.
The onshore yuan opened trade at 7.0369 per dollar versus its last close at 7.0250.
China’s state banks have been active in the onshore yuan forwards market this week, using swaps to decrease the supply of dollars, four sources with knowledge of the matter told Reuters.
The moves by state banks help reduce the supply of dollars that the market can access to short-sell the yuan.
The dollar index, which measures the greenback against six major currencies, was little changed on Wednesday at 97.474.
U.S. President Donald Trump dismissed fears of a protracted trade war with China on Tuesday, but Beijing has sent strong warnings that labelling it a currency manipulator would have severe consequences for the global financial order.
Spot gold, which is usually bought in times of economic uncertainty because of its safe-haven status, rose 1% to $1,488.99 an ounce.
Prices on 10-year U.S. Treasuries, another safe asset, also rose in Asia, pushing yields down to 1.6888%, close to the lowest in almost three years.
The euro stood at $1.1202, flat so far in Asian trading.
Elsewhere in currency markets, the New Zealand dollar erased gains to trade 0.7% lower at $0.6471 after the Reserve Bank of New Zealand cut interest rates by 50 basis points to a record low of 1.00%, confounding expectations for a smaller 25 basis point rate cut. (Reporting by Stanley White; Editing by Sam Holmes and Jacqueline Wong)