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FOREX-Safe-haven currencies stay in demand on China virus fears

By Kate Duguid

(New throughout; changes dateline, previous LONDON)

By Kate Duguid

NEW YORK, Jan 28 (Reuters) - Concerns about the economic fallout from the coronavirus outbreak in China supported safe-haven currencies on Tuesday, with the dollar index at a two-month high and the Swiss franc at a nearly three-year peak against the euro.

Though global markets had stabilized somewhat after Monday's sell-off, risk aversion in currency markets persisted, with the Australian dollar leading losers and the greenback strengthening to an eight-week high against a basket of six rivals.

The Japanese yen was off of Monday's high, last 0.26% weaker at 109.17 per dollar.

"Risk-off positioning has cooled off, though investor sentiment clearly remains wary, faced with the epistemological "known unknown" conundrum of how bad and how widespread and how economically damaging the coronavirus outbreak will be, wrote analysts at Action Economics.

President Xi Jinping said on Tuesday that China was sure of defeating the "devil" coronavirus that has killed 106 people. Yet despite his confidence, international alarm has risen: From France to Japan governments organized evacuations, while Hong Kong planned to suspend rail and ferry links with the mainland.

The Swiss franc, a traditional safe-haven investment along with the yen and the dollar, had strengthened to 1.067 francs per euro, its highest since April 2017. It had retraced some of those gains in North American trade, last 0.28% weaker on the day at 1.071.

Global stock markets and oil prices have tumbled in recent days on fears the virus could further damage China's already weakened economy. That also briefly inverted the three-month, 10-year U.S. Treasury yield curve, considered a fairly reliable recession predictor.

Still, currency moves were subdued, with the U.S. dollar adding to previous gains ahead of the start of a two-day U.S. Federal Reserve meeting later on Tuesday. Fed policymakers are largely expected to reiterate that interest rates will remain on hold this year.

The dollar index was last up 0.19% at 98.137, its highest since early December and taking its gains so far this month to 1.8%. Versus the euro, the dollar firmed 0.15% to an eight-week high of $1.100.

The Australian dollar, which is highly correlated to the Chinese economy, earlier in the session hit a fresh 15-week low and was last trading 0.15% weaker on the day at 0.675.

Stability in the offshore yuan, after a recent drop, provided some calm to nervous currency markets. The Chinese currency firmed 0.19% versus the dollar, rising off three-week lows. (Reporting by Kate Duguid and Saikat Chatterjee; editing by Jonathan Oatis)