Dollar shine fades as risk appetite bounces back for now

By Dhara Ranasinghe

LONDON (Reuters) - The dollar eased from recent 10-weak peaks on Tuesday as global risk appetite, hurt by a jump in U.S. government bond yields and a weakening Chinese economy, staged a rebound. Rising U.S. Treasury yields, with benchmark 10-year yields hitting 16-year highs on Tuesday, and unease over China have boosted the dollar in recent weeks.

"What we're seeing is a bit of a pause," said Fiona Cincotta, senior markets analyst at City Index in London. "We've had a strong rally in the dollar and there's a cautiously optimistic mood today." The U.S. dollar index - which measures the currency against six developed-market counterparts, was down 0.25% at 103.06, below Friday's 10-week highs at 103.68. Still, it is up just over 1% so far in August.

The dollar slipped 0.3% to 145.79 yen, pulling away from last month's nine-month peak after Bank of Japan Governor Kazuo Ueda met with the prime minister, although he said exchange-rate volatility was not discussed. Overall moves in the dollar were expected to be limited ahead of an upcoming speech by Federal Reserve Chair Jerome Powell at the Fed's central bank symposium in Jackson Hole, Wyoming.

"So much depends on what Powell says about whether rates will remain higher for longer," said Cincotta, referring to the dollar outlook. The greenback also came under pressure against European currencies as London trade got under way. The euro firmed a third of a percent to $1.0928, sterling was also up roughly 0.3% to $1.2798.

China's battered yuan saw respite and briefly popped to a one-week high versus the dollar as Beijing's efforts to slow its decline gained some traction despite pressure from rapidly rising U.S. yields and worries that the economy will continue to weigh on the currency. The Chinese central bank set the yuan mid-point at 7.1992 per dollar on Tuesday, 1105 pips firmer than Reuters' estimate, attempting to keep the floor under the currency following its slide to a 9-1/2-month low of 7.349 in offshore trading last week.

Tuesday's fix follows shallower and narrower interest rate cuts than markets had expected a day earlier, as stimulus measures continue to underwhelm in the face of property sector turmoil and weakening economic growth. The offshore yuan was a touch softer at around 7.30 per dollar, having firmed firming as much as 0.25% after the fix.

The Australian dollar was 0.4% firmer at $0.6441 as the global risk appetite recovered. It had dropped to a 9-1/2-month low of $0.6365 on Thursday. "It will likely take a big Chinese stimulus package focused on commodity?intensive infrastructure spending to turn around the downtrend in AUD/USD," Kristina Clifton, senior currency strategist at Commonwealth Bank of Australia, wrote in a note.

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