* 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 (Recasts story)
By Stanley White
TOKYO, Aug 7 (Reuters) – The Aussie and kiwi dollars skidded to multi-year lows on Wednesday after New Zealand’s central bank shocked markets by flagging the chance of negative interest rates, sending safe-haven assets soaring.
Reserve Bank of New Zealand (RBNZ) Governor Adrian Orr made the comments after the central bank stunned traders by cutting interest rates a larger-than-expected 50 basis points to a record low of 1.00% due to worries about the global economy.
The yen, which was already firmer versus the dollar, raced higher against most currencies as the RBNZ’s surprisingly dovish stance inspired risk-off trades.
China’s offshore yuan was off its record low, but still remained weaker versus the U.S. dollar in a sign that more sparks could fly between the United States and China.
The U.S.-China trade war has entered new territory after Washington labelled Beijing a currency manipulator, and there are growing concerns the trade standoff will place additional strain on the global economy.
“We were already on edge about all the U.S. tariffs against China, but now people are starting to question whether we’re headed toward some global recession,” said Kiyoshi Ishigane, chief fund manager at Mitsubishi UFJ Kokusai Asset Management Co in Tokyo.
“When currencies like the Aussie or kiwi fall this hard, it shows there is real risk aversion, which makes it easier for the yen to rise.”
The New Zealand dollar fell 2% to $0.6378, a level not seen since early 2016 and the largest one-day percentage drop since late March.
The Australian dollar skidded 1.1% to $0.6677, a level not seen since early 2009.
Against the yen, the kiwi dropped 2.3%, at one point falling to the lowest since late 2012, while the Aussie hit 70.74 yen, the lowest since April 2009.
The dollar fell 0.3% to 106.13 yen in Asian trading, but could face further losses after 10-year U.S. Treasury yields fell to a three-year low of 1.6580%, some analysts said.
Concerns are growing because 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.
“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 offshore yuan fell to 7.0815 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.
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. (Reporting by Stanley White; Editing by Sam Holmes and Jacqueline Wong)