The Japanese yen weakened to near-two-month lows against the dollar as financial markets took fresh US tariffs on Chinese goods in their stride and as US bond yields shot up to four-month highs on fears of rising inflation.

The British pound gained a tad in early Asian trade, hitting its highest levels in almost two months versus the dollar, the euro and the yen, on hopes the European Union and the UK will strike a deal to avoid a hard Brexit.

The yen dropped to a two-month low of 112.395 yen per dollar on Tuesday, edging closer to its July 19 trough of 113.18, which was its lowest in six months. It last stood at 112.26.

China and the United States plunged deeper into a trade war after President Donald Trump levied tariffs on $200 billion worth of Chinese goods, which drew quick retaliatory duties from Beijing on about $60 billion worth of US goods. “It seems as though the markets had already priced that in after media reports that Trump is planning to introduce the new tariffs,” said Shinichiro Kadota, senior strategist at Barclays.

Some took comfort from the fact that Washington's new duties were set at 10 per cent for now before going up to 25 per cent by the end of 2018, rather than an outright 25 per cent tariff. In addition, US bond yields shot up as tariffs added to concerns about higher US inflation, helping to boost the dollar against the yen. The 10-year US Treasuries yield rose more than 5 basis points on Tuesday to above 3.05 per cent, hitting its highest level since late May.

On the central bank front in Asia, the Bank of Japan is widely expected keep its policy on hold when it concludes its two-day meeting later on Wednesday. Markets will be looking to BOJ Governor Haruhiko Kuroda's post-meeting comments, with some expecting he may also warn about risks from US-led protectionism.

Sterling held firm on hopes about progress towards a Brexit deal ahead of an informal European Union summit in Salzburg on Wednesday and Thursday. The pound hit a high of $1.3175, its highest level in almost eight weeks and last stood at $1.3172, up 0.2 per cent in Asia. It hit a seven-week high of 0.8865 pound per euro and last stood at 0.88695. Against the yen, the pound hit a two-month high of 148.02 yen.

British Prime Minister Theresa May said Britain and the European Union were nearing a divorce deal. The EU's chief negotiator Michel Barnier said on Tuesday the European Union is ready to address key British concerns over Northern Ireland, in a clear push to get a Brexit deal effectively done in the next month. The euro was little changed at $1.1679.

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