Dollar weakens as yuan stabilises, euro gets technical support

NEW YORK (Reuters) - The U.S. dollar weakened against the euro on Tuesday as the Chinese yuan showed more stability, after the currency pair neared but failed to break through technical levels supporting the single currency.

U.S. dollar notes are seen in this November 7, 2016 picture illustration. . REUTERS/Dado Ruvic/Illustration

The dollar has been boosted by trade tensions as the U.S. economy is seen as better placed to handle protectionism than emerging markets, and as tariffs may narrow the U.S. trade deficit.

After a 6.5 percent rally since mid-April, however, the dollar index has struggled to break much above the 95.5 level, which it has tested multiple times in the past two months.

“It seems as if the DXY is having a lot of trouble to break through to new highs,” said Mark McCormick, North American head of FX strategy at TD Securities in Toronto.

The dollar index was down 0.27 percent at 95.105. It had risen to 95.652 on July 19, its highest since July 2017.

The euro gained 0.38 percent against the greenback to $1.1597. The euro has technical support at around $1.15.

A stabilizing Chinese yuan after China’s central bank on Friday raised the cost of shorting the currency, is seen as boosting the euro against the dollar. [nL4N1UU4C8]

“Dollar/CNH is driving everything in G10, especially the euro,” said McCormick.

“What the market was trying to figure out was, is China intentionally trying to weaken their currency or is China just letting their currency weaken?,” said McCormick. “I think now that we’re getting a little bit of certainty maybe it will reduce the volatility in dollar CNH, which in turn creates that floor for the euro at a lower end of the band.”

The yuan has fallen to 6.8325 from a more than one-year high of 6.9122 on Friday. The Chinese currency has weakened by around 7 percent since mid-June.

The Aussie rallied more than half a percent to a one-week high at $0.7439 against the greenback after the central bank kept policy setting on hold and the Chinese stock market rallied strongly towards the close, boosting risk appetite.

The main U.S. economic focus this week will be Friday’s consumer price inflation report for July, which is expected to show a 0.2 percent increase in core inflation in the month, according to a Reuters poll.

Editing by Bernadette Baum