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REFILE-FOREX-Yen, Swiss franc benefit as dollar falls on U.S.-China conflict and economic fears

(Refiles to add `FOREX’ to headline; no change in text.)

* Dollar index down 0.6%

* Euro up 0.6% vs dollar

* Swiss franc hits highest in 5 years

* Yen at four-month highs

* Graphic: World FX rates in 2020

London, July 27 - The dollar fell on Monday, after reaching its lowest since September 2018 overnight, as deteriorating U.S.-China relations and concerns about the U.S. economy saw investors look to the yen and Swiss franc as safe havens.

U.S. Secretary of State Mike Pompeo said Washington and its allies must use “more creative and assertive ways” to make the Chinese Communist Party change its ways.

With domestic economic concerns trumping its role as a safe-haven currency, the dollar index fell overnight, steadied in the early hours of the morning, then continued its descent. At 1058 GMT, the dollar index was at 93.777, down 0.6% on the day.

As COVID-19 infections show no signs of slowing in the U.S., investors are doubtful of a quick economic recovery. Nearly a quarter of the global total coronavirus deaths have been in the United States, where unemployment claims unexpectedly rose last week.

Some of the earlier steps to mitigate the financial impact, such as enhanced jobless benefits, are due to expire this month and Congress has yet to agree on fresh support.

“In the past the dollar was able to benefit from the U.S.-Chinese trade conflict. That is no longer the case now. What is at stake is no longer just trade. The US might be overstepping the mark with its policy towards China, just as with its measures against some European countries,” wrote Commerzbank analysts Ulrich Leuchtmann and Hao Zhou.

“If the dominance of the dollar in international trade and capital markets was to be reduced as a result, the USD weakness we are seeing at the moment would only be a very watered-down taste of things to come,” they added.

But Rabobank’s global strategist, Michael Every, said that the index is skewed by major constituent pairs such as dollar-yen and euro-dollar.

“This is mainly a DXY story driven by risk-on in EUR and risk-off in JP, and not a reflection of broader USD weakness over the year,” Every wrote. “We are just seeing some recent excess wound back – and the question is if it is temporary or not.”

The Federal Reserve meets on Tuesday and Wednesday. It could confirm recent hints about the benefits of an average inflation target, which would allow rates to stay lower for longer.

With the dollar’s role as safe haven in question, the Japanese yen and Swiss franc strengthened, suggesting that investors are seeking safety elsewhere.

Versus the dollar, the Swiss franc reached a five-year high of 0.9167 overnight. The dollar lost 0.8% against the yen, which strengthened to a four-month high of 105.265 .

“Under a general dollar sell-off environment the yen is benefiting as a safe-haven currency,” said Neil Jones, head of FX sales at Mizuho, adding that month-end flows were also playing a role.

“Markets are potentially looking for risk aversion currencies, and this seems to be a discretionary switch away from dollar into the yen and the Swiss franc,” he said.

There was still some risk appetite, with the Aussie and Kiwi dollars up, even after a resurgence of COVID-19 infections in Asia.

The Swedish crown strengthened to its highest since 2018 at 8.7495.

The euro continued its ascent after European Union leaders agreed a 750 billion-euro fiscal stimulus plan last week.

But European Central Bank board member Fabio Panetta warned that the danger to the euro zone economy is not over yet.

The euro hit fresh highs of $1.1729, up 0.6% on the day and at its highest since September 2018. Mizuho’s Jones said the rally was due to a substantial short position on the euro being unwound.

It was weaker versus the Norwegian and Swedish crowns .

Reporting by Elizabeth Howcroft; editing by Larry King