The dollar held on to recent gains on Tuesday ahead of U.S. President Donald Trump's State of the Union address which investors say could hint at progress in U.S.-China trade talks. A modest recovery in investors' risk appetite gave an overnight boost to U.S. yields but trading in currency markets was fairly subdued with many markets in Asia closed for Lunar New Year holidays.
The Australian dollar rose, reversing earlier losses, after the Reserve Bank of Australia (RBA) held rates at record lows at its first meeting of the year but sounded less dovish than expected. Investors said they were focused on Trump's address which has been delayed by the U.S. government shutdown. "We don't rule out more optimistic comments on trade... after the government shutdown, Trump is likely to seek policy wins," said Chris Turner, head of currency strategy at ING.
"This should be positive for the current risk friendly environment (solid US data, yet cautious Fed) and support emerging market currencies against the dollar." The dollar index, which measures the greenback against a basket of six key rivals, was up 0.1 percent at 95.98 after gaining for three straight sessions. The Aussie was last up 0.3 percent at $0.7247. It had traded in negative territory during most of the session after weak retail sales for December but swung into positive territory after the RBA held rates.
"It will be hard for the Australian dollar to close above $0.7300 given the stubbornness of rates markets still pricing in considerable chance of RBA easing this year, premised on the RBA simply being too optimistic," said Sean Callow, Sydney-based senior currency strategist at Westpac. The euro was flat at $1.1438, off three-week high of $1.15145 set on Thursday.
Sterling was 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.)