- US may raise China tariffs to 25 pct from 10 pct - sources
- Yuan and Aussie dip on risk of trade escalation
- Yen on defensive after BOJ pledge to keep rates low
The U.S. dollar edged up against the yuan and growth-leveraged currencies on Wednesday after a source familiar with the Trump administration's plans said the White House was about to propose higher tariffs on $200 billion in Chinese imports.
The news came as a survey showed China's factory sector grew at the slowest pace in eight months in July as export orders declined yet again.
The dollar added 0.4 percent to 6.8306 yuan CNH= after reports circulated President Donald Trump would propose tariffs of 25 percent, instead of 10 percent, in an announcement that could come as early as Wednesday.
The yuan has now fallen for four months in a row and China's central bank on Wednesday set the currency at its weakest since May last year.
The Australian dollar, often used as a proxy for China plays, dipped 0.2 percent to $0.7412 AUD=D3 . Against a basket of currencies the dollar added 0.15 percent to 94.631, while the euro was sidelined at $1.1681 EUR= .
"The jury is out on whether this is yet another 'clever' negotiating tactic by the U.S., but the market has reacted as expected and risk appetite looks set once again to pull back over the next couple of trading sessions," said Nick Twidale, COO at Rakuten Securities.
The dollar was also holding the whip hand against the yen after Tuesday's pledge by the Bank of Japan to keep rates extremely low for an extended period.
The dollar was poised at 111.92 yen JPY= as bulls girded for another test of resistance around 112.00.
"Relative to other major central banks, the BoJ is now decisively the last cab off the easy policy rank," said Ray Attrill, head of FX strategy at National Australia Bank.
"Higher inflation remains the BoJ's main priority and therefore we suspect the Bank will be at pains to make sure its actions don't result in a stronger yen."
HIKES AHOY In contrast, solid U.S. economic growth is likely to keep the Federal Reserve on track for another two hikes this year as it concludes its policy meeting later in the day.
Data out Tuesday showed U.S. consumer spending increased solidly in June even as wage growth stayed restrained.
The core PCE index, the Fed's preferred inflation measure, rose 1.9 percent from a year earlier for a third straight month, near the Fed's two-percent inflation target.
"Though the tariff tantrum ramped up a bit since the last FOMC confab, the core of the Fed is thus far unconvinced that this warrants any material shift in the outlook," said Tom Porcelli, chief U.S. economist at RBC Capital Markets.
"Our core view remains that the Fed is poised to raise the funds rate by additional 50 basis points this year and another 100 basis points in 2019."
The Bank of England holds its policy meeting on Thursday and markets are pricing in a near-90 percent chance of a quarter-point hike in rates.
Yet with the move already so discounted, sterling still edged lower to $1.3104 GBP=D3 .
