By Kate Duguid
NEW YORK (Reuters) - The U.S. dollar weakened against the Japanese yen on Tuesday as foreign exchange traders sought out safe-haven assets and placed bets on increasing currency volatility after President Donald Trump threatened to impose additional tariffs on Chinese goods.
The yen was trading at its strongest since March 28, last at half a percent better on the day at 110.18 per dollar. The Swiss franc and longer-dated Treasury bond prices were also buoyed as investors moved into high-quality assets.
"The primary story continues to be the U.S.-China trade agreement. Everyone is focused on that," said Thierry Wizman, global interest rates and currencies strategist at Macquarie Group.
The demand for yen bolstered the volatility index measuring moves in and out of the Japanese currency. The Chicago Board Options Exchange's Japanese Yen Volatility Index was last up 12.67%.
The price on other currency-related volatility products also rose. The euro index was up 4.75% on Tuesday and up 11.17% from Friday. The British Pound Volatility Index was last up 3.52%.
"Given investors have been selling volatility since January, they have probably sold more than they wanted and are now scrambling in the opposite direction," said Wizman.
Traders are "trying to cover their short volatility plays, trying to protect themselves with some optionality, sending foreign exchange vols higher and obviously sending the dollar higher against some of the key pairs," he added.
Trump tweeted on Sunday that he would raise tariffs on $200 billion worth of Chinese goods to 25% from 10% by the end of the week and would "soon" target the remaining Chinese imports with tariffs.
But top Chinese negotiator Vice Premier Liu He will head to Washington this week for talks, and some investors have interpreted Trump's threat as a negotiating tactic.
Although volatility indexes were higher, most moves in currencies were muted. After a bout of nerves Monday immediately following Trump's comments, foreign exchange traders expressed no fresh panic on Tuesday at the prospect of a breakdown in negotiations between China and the United States.
"As long as the talks continue, the market will remain relaxed ... that there will be a deal after all," said Esther Reichelt, currency analyst at Commerzbank.
The offshore yuan
The dollar index was 0.12% higher, last at 97.634, with the dollar 0.15% stronger against the euro at $1.118.
(Graphic: World FX rates in 2019 - http://tmsnrt.rs/2egbfVh)
(Reporting by Kate Duguid and Tommy Wilkes; Editing by Dan Grebler and Tom Brown)