Dollar index retreats from seven-week high, sterling rises

By Richard Leong

NEW YORK (Reuters) - The dollar dipped on Tuesday due to a fall in U.S. bond yields after touching a seven-week peak against a basket of currencies, as sterling rose following a report that rekindled hopes that Britain and the European Union are on the brink of a Brexit deal.

Investors dumped U.S. bonds last week on fears that domestic inflation might accelerate, prompting the Federal Reserve to hasten the pace of interest rate hikes.

On Tuesday, the benchmark 10-year Treasury yield climbed to a seven-year high at 3.261 percent before receding to 3.2101 percent on weaker equity prices and worries about global growth.

An index that tracks the dollar versus six major currencies (.DXY) was down 0.11 percent at 95.651 after hitting a seven-week peak at 96.155.

The euro was helped by a Dow Jones report that an agreement on the terms for Britain to leave the economic bloc may be reached as soon as Monday. The single currency had weakened earlier on worries about the tension between the EU and Italy over that country's budget.

"That flipped everything around. It salvages the open wounds from the Italian budget negotiations," said Boris Schlossberg, managing director of FX strategy at BK Asset Management in New York said of the Dow Jones report on a Brexit deal by Monday.

Dow Jones, citing unidentified diplomats, said both parties had narrowed their differences around the Irish border but some issues have not been solved.

Sterling reversed its earlier drop to rise to $1.3147, up 0.41 percent. Against the euro, it was up 0.36 percent at 87.45 pence per euro.

Earlier, Italian Economy Minister Giovanni Tria struck a resolute tone on his controversial budget plans in Rome's parliament. Italy's benchmark 10-year government bond yield rose toward a 4-1/2-year high.

The euro fell to a seven-week low of $1.14325. It was last at $1.15000, up 0.08 percent. The single currency was down 0.1 percent at 129.980 yen.

YUAN STEADIES

The Chinese yuan steadied near a seven-week low against the greenback as a liquidity squeeze in the offshore yuan market in Hong Kong helped stabilize sentiment.

The Chinese offshore yuan fell to 6.9350 yuan per dollar before retracing to 6.9158, which was little changed on the day.

At the weekend, China's central bank cut requirements on bank reserves in a bid to add more liquidity into its banking system as policy-makers worried about the economic impact of a heated trade row with the United States.

Sparring between Washington and Beijing on trade and Italy's proposed hefty debt target have stoked worries about slowing global growth, feeding safe-haven demand for the dollar.

The International Monetary Fund on Tuesday reduced its global growth forecasts for 2018 and 2019 to 3.7 percent from 3.9 percent for both years.

(Additional reporting by Tom Finn in London; Daniel Leussink in Tokyo; Editing by David Gregorio and Chizu Nomiyama)