The safe-haven Japanese yen briefly blipped higher on Monday as investors reacted to news China had cancelled trade talks with the United States just as the latest round of tariffs are set to take effect.

The trade-exposed Australian dollar went the other way, taking an early hit after China also summoned the US ambassador in Beijing and postponed military talks in protest against a US decision to sanction a Chinese military agency. President Donald Trump's second round of 10 per cent tariffs covering $200 billion of Chinese exports come into effect later on Monday.

The early currency moves came in very thin conditions with Japan and China on holiday and were mostly reversed as the morning wore on. The dollar was soon back at 112.60 yen, having been as low as 112.28 at one stage. The Aussie crawled up to 81.91 yen, after an initial drop to 81.34, but was still down 0.2 per cent on the US dollar at $0.7276.

The euro held at $1.1745, with dealers reporting some relief that German Chancellor Angela Merkel's ruling coalition resolved a dispute over the country's scandal-tainted spymaster on Sunday, ending a threat to the six-month-old government. The dollar was a fraction firmer against a basket of currencies at 94.244 as investors look ahead to an almost certain rate hike from the Federal Reserve on Wednesday.

A run of upbeat US economic data has also led markets to price in a much greater chance of a move in December as well, which should give the currency a fatter rate advantage over its major counterparts. Yet the dollar's yield buffers are already the widest in decades and it still failed to sustain a rally, being at much the same levels it was back in May.

Marshall Gittler, chief strategist at ACLS Global, suspected investors were concerned about how the US could continue to fund its trade and budget deficits. “Trump's 'easy-to-win' trade war doesn't seem to have done much yet to rectify the U.S. trade imbalance with China or any other country for that matter,” he noted. “And the tax cuts are blowing up the budget deficit. If the US can't offer more of a yield concession to attract money, it would probably have to offer a price concession via a weaker dollar in order to attract the money necessary to fund these deficits.”

The dollar was still faring better than the pound which on Friday suffered its sharpest one-day drop since June last year amid doubts about a Brexit deal. British Prime Minister Theresa May on Friday acknowledged that talks with the European Union had reached an impasse after the bloc's leaders had rejected her plans.

Opposition leader Jeremy Corbyn said on Sunday he would back a second Brexit referendum if his Labour Party votes to pursue the move, heaping further pressure on May. Sterling was last at $1.3079, far below last week's top of $1.3297.

“It is certainly hard to justify buying GBP in front of the Tory Party conference starting 30 September, which is going to be highly polarised and likely reinforce the lack of consensus,” wrote analysts at ANZ in a note. “There may be better levels to buy sterling.”

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