Trade war worries boost dollar towards recent highs; euro struggles

LONDON: The dollar rose towards 2 1/2-month highs on Tuesday, supported by worries about an escalation of the Sino-U.S. trade war.

The euro, pushed lower by the stronger dollar, slipped as traders prepared for a swathe of data, including euro zone GDP and German inflation.

Investors bought into the dollar after Bloomberg reported that Washington was preparing to announce tariffs on all remaining Chinese imports by early December if talks between U.S. President Donald Trump and Chinese President Xi Jinping fail to ease the trade war.

Trump and Xi are due to meet on the sidelines of the Group of 20 leaders summit in Argentina at the end of November.

"Trade wars, a recovery on equity markets and poor data out of Europe and stronger data in the U.S." were supporting the dollar at the euro's expense, said Niels Christensen, chief analyst at Nordea.

"I don't think the euro will bounce back. There's no reason for the ECB (European Central Bank) to start sounding more hawkish unless inflation surprises," he said.

The dollar, measured against a basket of its peers, rose 0.2 percent to 96.806, not far from 96.860, last week's 2 1/2- month high.

The euro was a touch lower at $1.1369, after reaching a 10-week low of $1.1332 on Monday when German Chancellor Angela Merkel said would not seek re-election as head of the Christian Democrats party.

The euro has also been weighed down by a standoff between Brussels and Rome over Italy's budget, which would breach the European Union's fiscal rules.

The Japanese yen extended its losses against the dollar after losing ground overnight, partly as Japanese investors have been net buyers of offshore equities in the current month. The yen fell 0.4 percent to 112.855.

Yen traders are also focused on the central bank's monetary policy meeting due Wednesday.

"We expect the Bank of Japan to leave policy on hold at its 31 October meeting. The policy board will likely revise down slightly its macro forecasts; continued downside risks to growth and inflation mean rate hikes are a long ways off," Bank of America Merrill Lynch analysts said.

In a sign that overall demand for risk was improving, the Australian dollar - often viewed as a barometer of global risk - gained half a percent to $0.7090 on Tuesday.

China's currency stabilised near 7 yuan per dollar as Asian stock markets rebounded, but as speculation remains over whether the central bank will tolerate a slide beyond that.

In offshore trade, the yuan stood at 6.9688, up 0.1 percent on the session.

Policy insiders told Reuters on Friday that China is likely to use its vast currency reserves to stop any precipitous fall through the psychologically important 7 level, which could risk triggering speculation and heavy capital outflows.