Dollar on front foot as worries about Hong Kong stir risk aversion

The dollar edged higher on Monday as worries about a standoff between the United States and China over civil liberties in Hong Kong fuelled demand for safe-haven currencies.

The yuan and the Australian and New Zealand dollars fell as risk-aversion hit foreign exchange markets.

Sterling was on the defensive after members of British Prime Minister Boris Johnson's party called for the resignation of an influential aide for breaking travel restrictions during the coronavirus lockdown.

A senior White House official has said Beijing's plan to impose a security law on the former British colony of Hong Kong could lead to U.S. sanctions, which could worsen an already tense relationship between the world's two-largest economies.

"The biggest concern is the tension between the United States and China," said Takuya Kanda, general manager of research at Gaitame.com Research Institute in Tokyo.

"Things were already bad, and it is likely to get worse because of the Hong Kong security law. This supports risk-off trades, which is positive for the dollar and the yen."

The dollar edged up to $1.0887 against the euro on Monday, close to its strongest in a week.

The dollar bought 0.9729 Swiss franc, also close to a one-week high.

The greenback held steady at 107.72 yen.

In onshore trade, the yuan eased slightly to 7.1422 per dollar, approaching the lowest in more than seven months.

Trading may be subdued on Monday with financial markets in Singapore, Britain and the United States closed for public holidays.

China's proposed national security legislation for Hong Kong could lead to U.S. sanctions and threaten the city's status as a financial hub, White House National Security Adviser Robert O'Brien said on Sunday.

Hong Kong police fired tear gas and water cannons to disperse thousands of people who rallied on Sunday to protest Beijing's national security law.

Washington and Beijing are also at loggerheads over Chinese companies' access to advanced technology and criticism of China's response after the novel coronavirus emerged late last year in Hubei.

The threat of sanctions over Hong Kong risks a repeat of last year's damaging trade war between the United States and China.

The British pound was little changed at $1.2175. Against the euro, sterling traded at 89.46 pence.

Johnson backed senior adviser Dominic Cummings on Sunday, despite calls from within his Conservative Party for the aide to resign.

Cummings, the architect of the 2016 campaign to leave the EU and widely considered to be Johnson's most influential strategist, came under pressure after reports that he travelled to northern England from London during a nationwide lockdown in March when his wife was ill with COVID-19 symptoms.

The Australian dollar gave up early gains to trade at $0.6528 as risk aversion offset optimism about the country's emergence from coronavirus lockdowns.

In New South Wales state, which includes the city of Sydney, children returned to school full-time on Monday, allowing many parents to work from their offices.

Australian states are pressing ahead with a three-stage plan to remove most social restrictions imposed by July.

Across the Tasman Sea, the New Zealand dollar drifted lower to $0.6093.