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US dollar steady as risk appetite returns

[NEW YORK] The US dollar on Tuesday clung to the previous day's gains, supported by a bounce in Treasury yields and ahead of US inflation data that could influence the timing of the next Federal Reserve interest rate increase.

The greenback also found support as investors further unwound bearish bets against it. The dollar index, which tracks the currency against a basket of six major rivals, was little changed at 91.892, after rising as high as 92.08.

The index rose 0.60 per cent on Monday, its largest gain this month, as receding worries about North Korea and Hurricane Irma helped lift investor risk sentiment. "The saber-rattling and the hurricane and all the other things that have been going on over the last few weeks seemed to subside a little bit," said Joe O'Leary, senior foreign exchange trader at Silicon Valley Bank in Santa Clara, California. "I think we are back to kind of a risk-on mode, although not tremendously." The dollar was 0.71 per cent higher against the Japanese yen, the highest since September 1.

On Tuesday, US stocks rose and long-dated Treasury yields reached two-week highs. "Interest rates are certainly supportive of the dollar,"said Erik Nelson, currency strategist at Wells Fargo Securities in New York.

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Short covering may have helped the dollar notch gains against other major currencies, analysts said.

An increasingly uncertain outlook for US monetary policy and fiscal policy has taken a toll on the dollar this year, and speculators have boosted bearish bets against the greenback to near record highs.

Investor focus now turns to US inflation data due on Thursday. "The US inflation data is a big risk for the markets and given the extreme short dollar positioning in the market, the greenback may jump higher if inflation surprises on the upside,"said Caxton FX analyst Alexandra Russell-Oliver.

Wells Fargo's Mr Nelson, however, said that over time, there is still room for that positioning to get more short.

Sterling rose against both the US dollar and euro after UK inflation hit its highest in five years, adding to the case for the Bank of England to do more to support the pound.

The euro was up 0.15 per cent against the US dollar at US$1.1969.