The yuan has rocketed and the US dollar has fallen sharply across the board after the Chinese central bank raised the forward reserve requirement for foreign exchange and said it would seek to keep its currency basically stable.
China's offshore yuan had slumped to a 14-month low earlier this week as investors sold the currency and rushed into US dollars on worries the trade conflict between Washington and Beijing would damage the Chinese economy.
"Its all about the dollar-yuan. That move there has been driving action across currency markets and pulling the dollar down broadly," said Valentin Marinov, Head of G10 FX Strategy at Credit Agricole.
"This move [by the central bank] makes it more difficult to bet against the yuan but the chances are we won't see a trend reversal in the dollar. The trade war, and the threat to China's economy, is the more dominate driver in the market."
China's central bank on Friday said it would set a reserve requirement ratio of 20 per cent - from an earlier zero - from Monday for financial institutions settling foreign exchange forward yuan positions.
The Chinese currency has tumbled almost 10 per cent since early April in offshore markets, and investors have speculated that its weakness would be encouraged by the People's Bank of China to counter the impact of US tariffs on its exports.
The offshore yuan reversed losses on Friday and rose as much as 0.8 per cent to 6.827, back to where it traded on Thursday.
The US dollar index gave up gains and slipped 0.1 per cent against a basket of currencies to 95.112. The greenback's sudden weakness pulled sterling, the euro and the Australian dollar into positive territory.
"What we have seen is quite a big depreciation [in the yuan] so I think, as we've seen in the past, when there are big moves the Chinese authorities are very anxious to ensure the market doesn't see the renminbi as a one-way bet," said Jon Harrison, head of emerging markets macro strategy at TS Lombard.
Before the Chinese central bank announcement, the US dollar had risen a fourth straight day, benefiting from turbulence caused by the escalating US-China trade conflict and as investors prepared for a US jobs report due later in the day.
Trade worries continue to rattle markets despite the backdrop of a strong US economy. China has said it will retaliate if President Donald Trump follows through on a threat to increase tariffs to 25 per cent from 10 per cent on $US200 billion in Chinese imports.
