The dollar was flat on Friday, but set for a fifth consecutive week of gains in its longest winning streak for 15 months, buoyed by demand for safer assets on worries about China's economy and bets that U.S. interest rates will stay high.
The People's Bank of China PBOC set a much stronger-than-expected daily fix, lifting the yuan from a 9-month low hit on Thursday.
The yuan weakened against the dollar in offshore trading after the PBOC set the official mid-point at 7.2006, and more than 1,000 pips stronger than Reuters' estimate.
China's economic problems have deepened, with property developer China Evergrande seeking Chapter 15 protection in a U.S. bankruptcy court. The shadow banking industry is also experiencing a surge of concern about default risks.
The U.S. dollar index, which measures the currency against six peers, edged down 0.01% after reaching a new two-month high of 103.680 earlier in the session. For the week, it is forecasted to gain 0.5%.
The dollar continues to string together this rally, said Joe Manimbo, senior market analyst at Convera. The U.S. economy has fared much better than expected, and it's causing the market to push out the timetable for when the Fed is likely to ease. Minutes from the Fed's last meeting showed this week that most members of the rate-setting committee continued to see significant upside risks to inflation.
Investors were also worried that Chinese authorities hadn't done enough to shore up the economy.
The PBOC cut rates earlier this week in a surprise move thatwidened the yield gap against the United States, making the yuan even more vulnerable to decline.
People are getting a little concerned with some of the statistics we've seen out of China, Trevisani, senior analyst at FXStreet.com, said.
If you get a industry that appears to be as overextended as the Chinese property sector, especially the retail and commercial sector, that really has a drag on the economy, he said.
The weakening dollar held traders on edge against the possibility of intervention by Japanese authorities.
The yen rose 0.38% compared to the dollar to 146.56 percent on Thursday, after reaching a nine-month low of 146.56 on Thursday.
If things go south in China, traditionally or historically there's been a move into the yen, which would strengthen the yen, Trevisani said.
In autumn of last year, the value of the dollar exceeded 145, causing the first yen buying intervention from Japanese authorities in a generation.
The AustralianAustralian dollar, often traded as a proxy for China, surged 0.04% to $0.640, after hitting a nine-month low of $0.6365 on Thursday.
Sterling fell to $1.2741, after British retailers reported a bigger-than-expected drop in July sales. The euro was up 0.04% at $1.08745 on Thursday, after hitting a six-week low of $1.0856 on Thursday.
Bitcoin, the world's biggest cryptocurrency, slipped 2.33% to $26,020 after dipping to a fresh two-month low, adding to a more than 7% drop on Thursday as a wave of risk-off sentiment grips global markets.
We suspect that the synchronized selloff in equities and fixed income eventually spilled over into crypto as crossover investors reduced portfolio risk, said experts at Grayscale Investments, a crypto asset manager.