July 3, 2018 / 12:43 AM / 4 months ago

FOREX-Dollar supported by sagging euro, bubbling trade tensions

* Dollar index holds bulk of overnight gains

* Euro weighed by political uncertainty in Germany

* Weakness by emerging market, commodity currencies lift dollar

By Shinichi Saoshiro

TOKYO, July 3 (Reuters) - The dollar held firm on Tuesday, as political uncertainty in Germany weighed on the euro, after German Chancellor Angela Merkel’s interior minister offered to quit in an escalating row with a key coalition partner over migration policy.

The euro was little changed at $1.1641 after shedding 0.45 percent overnight.

Trade tensions also supported the dollar against commodity currencies, like the Australian dollar, and emerging market currencies whose economies are most vulnerable to a downturn in trade.

The dollar index against a basket of six major currencies was 0.15 percent lower at 94.882 after gaining about 0.45 percent the previous day.

“There’s a strong element of ‘risk off’ generated by trade concerns behind the dollar’s latest rise. That said, the dollar has managed to gain only as emerging market and commodity currencies have slid due to risk aversion,” said Masafumi Yamamoto, chief forex strategist at Mizuho Securities in Tokyo.

“A currency of a country with a large current account deficit is not usually a choice destination during risk aversion, but the dollar is high in liquidity, which is a draw.”

Commodity-linked currencies such as the Australian dollar fell to a 1-1/2-year low on Monday and the Chinese yuan has retreated to nine-month lows amid nervousness ahead of July 6, when U.S. tariffs on Chinese exports are due to take effect.

The Reserve Bank of Australia (RBA) holds its monthly policy meeting on Tuesday and is considered certain to keep rates at 1.5 percent, where they have been since mid-2016.

Focus was on whether the RBA makes a mention of the recent U.S.-China trade tensions.

The Aussie was flat at $0.7340 after dropping to $0.7311 overnight, its lowest since January 2017.

The dollar was steady at 110.895 yen after edging up 0.2 percent the previous day, supported by robust U.S. economic data, higher Treasury yields and a bounce in shares on Wall Street. (Editing by Simon Cameron-Moore)

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