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Sino-U.S. trade dispute: Dollar rises before Federal Reserve; trade woes check risk appetite

The dollar carved out small gains against the euro and yen on Tuesday as investors looked to policy clues from the U.S. Federal Reserve, which is widely expected to hike rates this week, and as the Sino-U.S. trade dispute kept markets cautious.

The euro edged lower, having hit a 3-1/2-month high in the previous session after European Central Bank chief Mario Draghi expressed confidence in eurozone inflation and wages growth.

Global markets have been sideswiped over the past few months as the intensifying trade row between China and the United States stoked uncertainty about the outlook for global growth and broader monetary policy for some developed and emerging market economies.

On Monday, the United States and China imposed a new round of tariffs on each other's goods with no sign either side is willing to back down.

The Fed begins its two-day policy meeting later on Tuesday at which it is expected to raise interest rates for the eighth time since late 2015. Markets are also betting on another rate hike before year-end, though the outlook for 2019 is less clear.

"The dollar remains the absolute go-to currency when there is any question about risk or stability or any of these geopolitical situations," said Bart Wakabayashi, Tokyo branch manager at State Street Bank.

"If we have negative news out of the Brexit talks, that's going to be a huge push for the dollar...If we get some sort of more-than-expected hawkish sentiment out of (the Fed), that should be another push for the dollar," Wakabayashi said.

The dollar index, which measures the greenback against a basket of six major currencies, was 0.15 percent higher at 94.323.

Against the Japanese yen, the dollar gave up some of its gains after the release of minutes from the July policy meeting by the Japanese central bank.

The minutes showed a few of the Bank of Japan's board members said the central bank must consider more seriously the potential dangers of ultra-easy policy, such as the negative impact on the country's banking system.

The greenback edged 0.05 percent higher to 112.86 yen, after briefly reaching as high as 112.96 yen, its highest level since touching 113.18 yen on July 19, in early trade.

The Australian dollar, a proxy of China-related trades and a gauge of broad risk appetite, shed 0.2 percent to $0.7240, extending losses from the previous two sessions.

Speculators have ramped up bets that interest rate differentials between the United States and other major economies, including Japan and Australia, will increase.

For example, net long positions for the dollar have grown to nearly $25 billion according to CFTC data.

The euro was slightly lower at $1.1749 after surging to $1.1815 the previous day, its highest level since June 14, before giving up most of its gains during U.S. trade overnight.

The common currency rose after ECB's Draghi on Monday described an acceleration in underlying inflation in the eurozone as "relatively vigorous" and expressed confidence that a pick-up in wage growth would continue.

But Draghi reaffirmed the ECB's pledge to keep rates at their current, rock-bottom level "through the summer" of next year, effectively rebuffing calls from some policymakers to tighten policy more quickly.

"The sentiment of euro area corporates is not as buoyant as before, so I think it's not the timing for the ECB to be more hawkish," Yamamoto said.

"The rise of the euro was temporary yesterday because there is an anchor for the interest rate expectation for the euro area." (Editing by Shri Navaratnam and Sam Holmes)



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