LONDON: The euro fell to a new 16-month low versus the dollar on Tuesday, while Asian currencies gave up their gains from dialogue between the U.S. and Chinese presidents.
The dollar index held near its highest in 16 months, having rallied since U.S. inflation data last week showed consumer prices surged to their highest rate since 1990, fuelling speculation that the Federal Reserve may raise interest rates sooner than expected.
Investors are waiting for U.S. retail sales data due later in the session, which could also influence the outlook for interest rates.
At 1238 GMT, the dollar index was flat on the day at 95.541 .
The euro was flat versus the dollar at $1.1367. Earlier in the session dropped to $1.1352, its weakest since July 2020, extending recent losses on Monday after dovish comments from European Central Bank President Christine Lagarde. .
Lagarde said that tightening monetary policy now to rein in inflation could choke off the euro zone's recovery, comments which were viewed as pushing back on calls and market bets for tighter policy.
"Markets are still assuming that the ECB is in a very different position and latitude to the Fed, so that sort of rates-spread argument as well as concerns about the re-imposition of restrictions across the euro zone_ are just keeping the euro very much on the defensive," said Jeremy Stretch, head of G10 FX strategy at CIBC.
UniCredit strategists said in a note that "even if lower-than-consensus economic data are released this afternoon in the U.S., including retail sales and industrial production, we doubt that this is likely to alter the scenario now that selling EUR-USD into rally remains favoured."
Euro drops ahead of ECB meeting, yen looks past BOJ doves
On Monday, Austria imposed a lockdown on unvaccinated people, while Germany's parliament is due to vote on Thursday on stricter measures to deal with surging cases. France, the Netherlands and many countries in Eastern Europe are also experiencing a surge in infections.
"The fear that the situation could escalate and result in a more significant tightening of restrictions in the coming months is hurting sentiment towards European currencies," MUFG currency analyst Lee Hardman said in a client note.
U.S. President Joe Biden and Chinese leader Xi Jinping stressed their responsibility to the world to avoid conflict, in talks which gave Asian currencies a lift overnight. But support for riskier currencies ebbed somewhat as the talks did not appear to lead to any particular breakthrough.
The dollar hit a five-month low against China's offshore yuan overnight, at 6.3615, and was still down around 0.1% on the day at 1242 GMT, at 6.3877.
But the Australian dollar - seen as a liquid proxy for risk appetite - was down 0.1% at $0.73385.
The British pound was up 0.3% against the dollar at $1.3467, having risen after data showed British employers hired more people in October after the government's job-protecting furlough scheme ended.
The Swedish crown was up around 0.3% against the dollar at 8.789. Swedish headline inflation hit its fastest pace since 2008 in October, data on Monday showed.
"We assume that the Riksbank will call the rise in inflation temporary at its meeting next week," wrote Commerzbank FX and EM analyst You-Na Park-Heger in a client note.
Elsewhere, the cryptocurrency bitcoin fell back below $60,000, for the first time since November 1.
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