FOREX-Dollar set for first monthly gain since October; China hobbles yuan

By Amanda Cooper

LONDON, Feb 27 (Reuters) - The dollar headed for its first monthly gain since October on Friday, boosted by simmering geopolitical tensions, while the yuan lost momentum after China hit the brakes on a long-running rally.

The Australian dollar AUD=D3 was set for a fourth straight monthly gain, propelled by expectations that the central bank would shift towards raising interest rates, as the economy powers ahead.

On the geopolitical front, Pakistan bombed Taliban government targets in Afghanistan's major cities, and Pakistan's defence minister spoke of "open war".

U.S. and Iranian representatives made progress in talks about Tehran's nuclear program on Thursday, mediator Oman said, but there were no signs of a breakthrough that could avert potential U.S. strikes amid a massive military buildup.

The mood across global markets has been fragile this week, as investors assess the potential disruption from artificial intelligence to companies and the underlying economy, which has drawn capital to the perceived safety of gold and the dollar.

"The dollar has been trading in a little bit of a holding pattern. It feels like it's waiting for its next real catalyst," said City Index market strategist Fiona Cincotta.

"You've got headwinds - concerns about policy uncertainty, tariffs and the lack of clarity there. Tailwinds - you've got the prospect of the Fed just keeping interest rates on hold for longer; you've got that slight safe-haven demand from geopolitical concerns," she said.

"But it doesn't feel like there's anything that's really driving the moves right now."

The dollar has gained around 0.6% against a basket of currencies this month, helped by Federal Reserve policymakers signalling that more rate cuts were not necessarily a given and several expressing openness to hikes if inflation remains high. Traders expect two more rate cuts this year, but not before June.

YUAN PAUSES

The yuan took a breather from a 10-day rally after the People's Bank of China (PBOC) moved to slow the pace of the rise. It said it would scrap the foreign exchange risk reserves for some forward contracts - seen as a way to encourage dollar buying.

That, alongside a weaker-than-expected yuan midpoint fix, sent the onshore yuan CNY=CFXS down 0.12% to 6.8589 per dollar. It has still gained around 2% so far this year, after appreciating more than 4% in 2025. The onshore yuan CNH=EBS was a touch weaker, leaving the dollar up 0.18% at 6.8569 yuan.

"It is clear that the PBOC wants the yuan appreciation pace to slow," said analysts at Maybank.

They said its recent gains could reflect the view that China has gained leverage after the U.S. Supreme Court found the basis of President Donald Trump's tariffs invalid.

The prospect of a divergence in global interest rates has driven much of the currency action this month.

The Aussie dollar was steady at $0.7109. It is the best-performing G10 currency this year, with a gain of 6%.

The Bank of Japan is also set to raise rates, though that has done little to help the yen JPY= as domestic politics complicate the rate outlook, despite BOJ Governor Kazuo Ueda signalling openness to a near-term hike. The yen has weakened throughout February, allowing the dollar to gain nearly 0.9%. On Friday, it traded at 156.17 yen.

Sterling GBP= slipped 0.1% to $1.348, and was set to snap three straight months of gains with a 1.4% fall in February. The pound also traded at its weakest against the euro this year. The euro was last up 0.1% at 87.605 pence.

A local election in Manchester on Thursday delivered a big victory to the Green Party and a blow to Prime Minister Keir Starmer's Labour, whose popularity has slid sharply in the past year. Sterling is fairly sensitive to domestic politics, but with a number of risk events ahead, such as next week's budget update from finance minister Rachel Reeves, any volatility was contained.

"Whilst it gives us a lot of interesting information about where Labour sits, it's not sufficient to really put Keir Starmer on a path to the door out," City Index's Cincotta said.

The euro EUR= was stable at around $1.18, set for a monthly loss of 0.4%.