China's yuan weakens as Ukraine-Russia conflict adds to market anxiety

China's yuan weakened against the dollar on Tuesday as investors rushed to safe-haven currencies amid elevated market anxiety after Putin ordered troops into breakaway regions of Eastern Ukraine.

China's yuan weakened against the dollar on Tuesday as investors rushed to safe-haven currencies amid heightened market anxiety after Russian President Vladimir Putin ordered troops into breakaway regions of eastern Ukraine.

The People's Bank of China set the midpoint rate at 6.3487 per dollar prior to market open, weaker than the previous fix 6.3401. In the spot market, the yuan opened at 6.3380 per dollar and was changing hands at 6.3440 at midday, 88 pips weaker than the previous late session close.

"An outbreak of military conflicts could spark knee-jerk USD and other safe-haven currencies buying, while EM Asian currencies could come under pressure," said Ken Cheung, Chief Asian FX Strategist at Mizuho Bank in a note. "Still, we expect the RMB to show some resilience if the conflicts continued, considering the geographical proximity and China's less direct involvement in the conflicts," Cheung said. Meanwhile, some traders said strong corporate demand after the Lunar New Year holidays might give the yuan some support and they expected it to remain range-bound in short term. 

Putin on Monday recognised two breakaway regions in eastern Ukraine as independent and ordered the Russian army to launch what Moscow called a peace-keeping operation into the area, upping the ante in a crisis that could unleash a major war.Washington and European capitals condemned the move, vowing new sanctions. Ukraine's foreign minister said he had been assured of a "resolute and united" response from the European Union.

The fears also drove U.S. Treasury yields lower. Bets on Federal Reserve rate hikes also eased and the chance of a 50-basis point hike next month fell to below 1-in-5. Chinese Finance Minister Liu Kun said on Tuesday that China will implement bigger cuts in taxes and fees this year while strengthening coordination between fiscal and monetary policy.

The global dollar index rose to 96.186 from the previous close of 96.078. The offshore yuan was trading at 6.3431 per dollar.