* Dollar index trades near nine-month high
* Chinese yuan at lowest since began trading in 2010
* Euro close to eight-month lows
* Dollar/yen at 12-day high
By Jemima Kelly
LONDON, Oct 25 (Reuters) - The dollar trod water on Tuesday but stayed close to a nine-month high, as solid U.S. manufacturing activity and comments from a Federal Reserve official heightened expectations of a rise in interest rates by year-end.
China’s yuan hit its lowest against the dollar since offshore trading was introduced in 2010. The dollar has gained almost 4 percent against a basket of six major currencies in the past month alone.
Chicago Fed President Charles Evans said on Monday the Fed might raise rates three times between now and the end of 2017, so long as inflation expectations and the labour market continued to improve. Those comments built on similarly hawkish remarks from fellow Fed rate-setters in recent weeks.
The dollar index reached as high as 98.846 on Monday, slipping to 98.762 by 10.40 GMT on Tuesday. After first gaining against the euro, the U.S. currency eased to trade flat at around $1.0877, after data showed German business morale rose to a 2 1/2-year high in October.
“The dollar may be backing off recent highs on Tuesday, but overall we think its trend remains,” said City Index research director Kathleen Brooks, in London. “The Fed Funds Futures market is now pricing in a 70 percent chance of a rate hike - this time last week that was 65 percent.”
The yuan’s fall of more than 1.5 percent against the dollar since the end of September has fuelled suspicion among some in the market of an extended slide in the Chinese currency. It traded as cheaply as 6.7882 yuan per dollar on Tuesday.
Officials, however, reiterated their expectations for a stable currency. And analysts pointed out that global risk sentiment was holding up. By contrast, the yuan’s rapid depreciation earlier this year after China’s devaluation last August spread turmoil in global financial markets.
“That highlights the extent to which dollar gains are unlikely to be as extended as they were (in the past),” said BNP Paribas currency strategist Sam Lynton-Brown, in London.
“As the dollar pushes higher against the yuan, which has a large weighting in the Fed’s exchange rate, it means the Fed is going to be more likely to rein in some of its more hawkish rhetoric, because of the strong dollar, negative risk feedback loop,” he added.
The dollar also rose against the yen, gaining 0.4 percent to a 12-day high of 104.595 yen, just below a 2 1/2-month high of 104.635 yen set earlier this month.
For Reuters new Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets (Additional reporting by Hideyuki Sano in Tokyo and Masayuki Kitano in Singapore, editing by Larry King)