Dollar inches higher as stock markets steady

By Patrick Graham

LONDON (Reuters) - A minimal recovery in stock markets helped the dollar gain some ground on Monday against Europe's current safe havens of choice, the euro and the Swiss franc.

With trade thinned out by the absence of U.S. markets for a holiday, China's yuan gained around half a percent on a Reuters report of new moves to add to funding costs for foreign players speculating against the currency.

That sent the dollar/yuan rate back below 6.60 -- around 2.5 percent off highs for the greenback reached in the first week of January -- and eased some of the concern over Chinese markets that has dominated major currencies since the start of the year.

The Australian dollar also gained around half a percent while other commodity currencies stabilized despite another dip in the price of oil after Friday's 5 percent dive.

Predicted to fall at the start of 2016 on the increasing difference between U.S. and euro zone interest rates, the euro has instead see-sawed on the back of investors' appetite for risk, or lack thereof. Few expect this week's European Central Bank meeting to change that dynamic.

"With the ECB likely not close to additional easing, this week’s meeting looks unlikely to stand in the way of safe-haven buying of the euro," said Josh O'Byrne, a currency strategist with Citi in London.

"After the ECB's message on easing in December investors see the bar a bit higher in the near term for the divergence trade. There is more volatility in other things."

The dollar gained around a quarter of a percent against the euro to $1.0893 and 0.5 percent to 1.0050 francs .

It also inched higher to 117.33 yen.

Market participants remained skeptical about the prospects for a sustained improvement in risk appetite, however, given the selloff in global equities seen so far in January.

Data from China, echoing official reserves numbers, showed selling of yuan by Chinese banks more than doubled to the equivalent of $95 billion in December from November.

"I think we will continue to see demand for yen in the short term," said Jesper Bargmann, head of trading for Nordea Bank in Singapore. "I think the market is nervous and we will see further risk aversion."

Investors in Asia had taken aim at the Canadian dollar, driving it to a near 13-year low of C$1.4650 against the U.S. dollar on expectations the Bank of Canada will cut interest rates as early as this week.

But some in Europe were already arguing last week that the extent of the falls in the Canadian dollar -- another 7 Canadian cents weaker against the dollar so far in January -- might stay policymakers' hand on further rate easing.

"That squeeze we've seen on the CAD today is clearly about some pullback on expectations for this week's meeting," said a dealer with one international bank in London.

The dollar had recovered to gain 0.2 percent on the day against its U.S. counterpart in early European trade.

(Additional reporting by Masayuki Kitano in Tokyo; Editing by Catherine Evans)

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