October 30, 2018 / 3:09 PM / 22 days ago

FOREX-Dollar holds near 2-1/2 month high as trade war jitters linger

* Fears of more U.S. tariffs on Chinese goods help dollar

* Euro zone GDP weaker than expected in Q3, sentiment sours

* Yuan hit a 22-month low in offshore markets (New throughout, updates rates, comments to U.S. market open; new byline, changes dateline; previous LONDON)

By Saqib Iqbal Ahmed

NEW YORK, Oct 30 (Reuters) - The dollar held on to modest gains near a 2 1/2-month high against a basket of major currencies on Tuesday, supported by worries about an escalation of the Sino-U.S. trade war and more signs the United States economy is outperforming its peers.

The dollar index, which measures the greenback against six major currencies, was 0.25 percent higher at 96.823. Earlier in the session, the index hit a high of 96.948, its strongest since mid-August.

“It’s a bunch of things coming together at once to support the dollar,” said Brad Bechtel, managing director FX at Jefferies, in New York.

Weakness among Asian exporters related to concerns about trade and global growth, worries about slowing European growth and political uncertainties in Germany and Italy were behind the dollar’s recent outperformance, Bechtel said.

On Monday, U.S. President Donald Trump said he thought there would be “a great deal” with China on trade, but warned he had billions of dollars worth of new tariffs ready to be implemented if a deal wasn’t possible.

With concerns about an escalating trade war and a Chinese economic slowdown mounting, the yuan hit a 22-month low in offshore markets.

The Australian and New Zealand dollars jumped on Tuesday as investors picked up risky assets although analysts warned any rally is likely to be short-lived amid simmering global trade tensions.

The euro, which weakened on Monday on news German Chancellor Angela Merkel would not be seeking re-election as head of the Christian Democrats party, was 0.08 percent lower against the dollar.

The euro zone economy grew less than expected in the third quarter as the public mood turned darker, with signs of distress in Italy highlighting concerns that the bloc’s third-ranked state was becoming one of its weakest links.

Meanwhile, U.S. consumer confidence rose to an 18-year high in October, driven largely a robust labor market, suggesting strong economic growth could persist in the near term.

Bechtel also attributed some of the dollar’s recent strength to year-end dollar funding needs, referring to the need of banks and other institutions to adjust dollar-denominated liabilities and assets on their balance sheets.

“We have seen this dynamic play out in the past three years, where the dollar is supported in the fourth quarter,” he said.

The greenback was 0.36 percent higher against the Japanese yen, as traders prepared for a Bank of Japan monetary policy meeting due Wednesday.

The Bank of Japan is considering tweaking its bond buying operations to allow the government debt market to better reflect fundamentals, people familiar with the matter said, following years of heavy central bank buying in the sector.

Sterling languished at a ten-week low as concern about Britain’s departure from the EU led investors to largely ignore hopes of an end to austerity raised by Britain’s finance minister Philip Hammond.

Reporting by Saqib Iqbal Ahmed; Editing by Bernadette Baum

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