Early trade in New York: Dollar gains as US-China trade worries diminish risk appetite

The dollar gained for a second consecutive day on Tuesday as fading optimism over the latest China-US trade truce prompted traders to buy the greenback after a selloff last week.

The combination of some tepid US data and hopes of a breakthrough in a protracted trade conflict between Washington and Beijing prompted funds to unwind some of their dollar long bets recently, putting the US currency under selling pressure.

"After the recent flushout of dollar long bets, currency investors have reassessed the short-term outlook and have come to the view that there is not going to be much of a movement on the trade issue," said Stephen Gallo, European Head of FX Strategy at BMO.

Reports of a "Phase 1" trade deal between the United States and China last week had earlier cheered markets but the dearth of details around the agreement has since curbed this enthusiasm with oil prices extending declines, Chinese stocks weaker and the safe-haven yen holding gains versus the dollar.

Against a broad basket of its rivals, the dollar was up 0.13% to 98.583 and around 1% away from a near 2-1/2 year high of 99.667 hit earlier this month.

Fading hopes over a trade deal also pulled the Chinese currency lower. China's yuan slipped in offshore markets, a day after reaching a one-month high. The offshore yuan traded at 7.087 against the dollar, off Monday's high of 7.051.

Elsewhere, sterling trimmed some of its earlier gains as officials raced to put a Brexit deal in place. The European Union gave Britain until the end of Tuesday to work out a deal that can be approved at a leaders' summit this week but said a delay to the October 31 scheduled departure date and a breakdown of talks were also still on the cards.

The pound was up 0.5% at $1.267, trimming some of its gains after being up nearly 0.7% in early London trading.