Chinese financial markets have been jittery ahead of a July 6 deadline, when the U.S.is set to slap tariffs on $34 billion worth of Chinese goods that Beijing has vowed to match with tariffs on US products.
Shanghai shed 0.2 percent and Singapore lost 0.5 percent, while Tokyo ended the morning marginally lower after fluctuating through the morning.
Also muddying trade relations between the world's two largest economies was a Chinese court ruling that temporarily barred US chipmaker Micron Technology Inc from selling some of its main products in the world's biggest memory chip market.
"The market remains supported by a production outage in Libya and the overhang from recent United States. data which suggest United States supplies are running very tight", said Stephen Innes, head of Asia-Pacific trade at OANDA.
The dollar retreated 0.4 percent against a basket of currencies .DXY and the easing tensions in Germany helped the euro to gain 0.2 percent against the greenback EUR=D3 .
The yuan fell to 6.7204 per United States dollar, its weakest since last Aug 7, and the first time it has dropped below 6.7 since Aug 9, before crossing back and forth over the line. At 0542 GMT it was trading at 6.7010.
"This would likely dent China's hopes of further internationalizing the [yuan] - and should in itself be a deterrent to using [the yuan] as a policy option in the trade wars", Kojodjojo said. Beijing has said it would retaliate with tariffs on USA products.
Short-covering rallies should not be confused with trend reversals, and provided traders continue to view escalating trade tensions will reduce the USA trade deficit, thereby benefiting the dollar, gold will continue to remain out of favour.
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A trader at a Chinese bank said the PBOC's signal was clear, but the market would closely watch developments ahead of Friday.
"The (trade dispute) impact is limited as we have localized technologies and suppliers (about 70 percent)", Zhang Yu, senior vice president of BOE, said during a display show held recently in Shanghai. -China trade tensions may pose a risk.
The mood was more cheerful in Europe where a pan-European equity index rose half a percent .STOXX , the euro firmed marginally and bond yields rose after German Chancellor Angela Merkel struck the deal with her Bavarian conservative coalition partners.
"So if you have all these currencies weakening and the dollar strengthening against other emerging markets currencies as well, it generates a degree of instability in the market simply by virtue of its scale".
The Aussie dollar came off a 1-1/2-year low of $0.7311 plumbed overnight, fetching $0.7368.
The Chinese central bank set the Yuan reference rate at 6.6157 on Monday (vs Friday's fix of 6.616), snapping eight straight days of the lower fix.
Energy stocks have been boosted by Brent crude's rise past $78 a barrel, McPherson noted.