REFILE-FOREX-Dollar holds firm on rise in U.S. yields, Aussie slips

The dollar held on to recent gains against its peers on Tuesday, supported by a recovery in investor risk appetite, which gave an overnight boost to U.S. yields, while the Australian dollar dipped on dismal retail sales data. The dollar index, which measures the greenback against a basket of six key rivals, was barely changed at 95.824 after gaining for three straight sessions.

"The overly pessimistic view on developed economies and the overly dovish view on the (Federal Reserve) is being unwound," said Masafumi Yamamoto, chief currency strategist at Mizuho Securities. Trading was likely to remain subdued in Asia with many markets across the region closed for Lunar New Year holidays for much of the week.

The index rose 0.7 percent after dipping last week below its 200-day moving average for the first time since early January 2018. It gained as Treasury yields rose with that of the 10-year jumping 9 basis points over the past two sessions. Yields have climbed after MSCI's gauge of global stocks hit a two-month high on Monday as optimism over recently concluded U.S.-China trade talks helped send U.S. technology and industrial shares higher. Against the Japanese yen, the dollar gained 0.1 percent to 109.99 yen. It had risen above 110 yen for the first time since Dec. 31 overnight.

"There's further room to rise for the U.S. two-year yield. If this move continues, dollar/yen will rise above 110" again, said Mizuho's Yamamoto. The euro was flat at $1.1438, off three-week high of $1.15145 set on Thursday. The Australian dollar shed 0.3 percent to $0.7209 as local retail sales for December came in weaker than expected, capping a lousy quarter of disappointing data in yet another blow for the economic outlook. The Reserve Bank of Australia (RBA) will make a policy decision on Tuesday, followed by a highly-anticipated speech by Governor Philip Lowe on Wednesday.

The central bank is all but certain to hold rates at record lows, though some market players now see a cut later this year due to mounting signs of economic weakness. Sean Callow, Sydney-based senior currency strategist at Westpac, said the RBA would likely lower its 2019 and 2020 gross domestic product forecasts from wildly bullish to just upbeat.

"Overall this should be net positive for the Australian dollar, but probably not greatly, given the stubbornness of interest rate markets in pricing in rate cut risk," Callow said. "Since today's statement has to be a little less gung ho on growth and the global outlook, the doves will have something to seize upon."

Sterling was basically flat at $1.3038 after seesawing during the previous session on uncertainty over the way Britain will leave the European Union. In late Monday trade, sterling gave up gains made earlier in the day after a newspaper report said that goods shipped to Britain from the European Union could be waved through without checks in the event of a "no-deal" Brexit. The Canadian dollar was a shade weaker against the greenback. It fell one tenth of a percent overnight, reversing some of last week's rally, as oil prices fell and the greenback broadly climbed.

(With inputs from agencies.)