May 22, 2018 / 12:37 PM / a year ago

FOREX-Dollar rally falters as Treasury yields dip

* Dollar index trades below previous day’s five-month high

* Euro eases, but remains above six-month lows set on Monday

* Near-term focus on Fed minutes due Wednesday

* Graphic: World FX rates in 2018 (Adds context, updates figures)

By Tom Finn

LONDON, May 22 (Reuters) - The dollar’s rally faltered on Tuesday as Treasury yields dipped after a broad surge in the currency prompted by easing U.S.-China trade tensions.

The dollar’s index against a basket of six major currencies last traded at 93.414, down from a five-month high of 94.058 set on Monday.

U.S. Treasury yields pulled back from last week’s seven-year highs, encouraging traders to cash in bullish dollar bets, said Gavin Friend, senior markets strategist at NAB in London.

“It’s been a hefty surge for the dollar, so this looks to me like a bit of profit-taking,” Friend said.

The prospect on Monday of a resolution to the U.S.-China trade conflict supported the dollar. On Tuesday, China said it would cut import tariffs for automobiles, opening greater access to the world’s largest auto market, in a further sign of easing trade tensions.

But the dollar floundered and was headed for its biggest daily loss in two weeks as the euro rebounded from the 4 1/2-month low of $1.1717 it reached on Monday.

Before that, the dollar had strengthened by 5.4 percent since mid-February, its biggest gain since 2015. Investors who had taken big positions against the dollar rushed to unwind and cover their positions, pushing it even higher.

The view that many parts of the global economy were expanding together had given the dollar less of an edge over other currencies earlier this year.

Over the past month, however, the dollar has been bolstered by generally solid U.S. economic data that has reinforced expectations that the Federal Reserve would raise borrowing rates at least two more times this year.

Investors will study the minutes of the U.S. Federal Reserve’s last policy meeting, due on Wednesday, for signs of whether the central bank is willing to accept above-target inflation for a time.

The dollar has also strengthened against the euro amid political uncertainty in Italy. The country’s anti-establishment 5-Star Movement and the far-right League on Monday proposed Giuseppe Conte as prime minister to lead their coalition government.

The euro rose 0.3 percent to $1.1830, after earlier falling to its lowest level since around mid-November.

This week will bring about a further test for euro bulls with the release of preliminary PMI data for May on Wednesday. Markets are waiting to see whether Europe’s first-quarter slowdown has spilled over to later months.

“We still look to Wednesday’s PMIs as a flash point for the euro and see downside risks to the manufacturing numbers,” said Elsa Lignos, global head of FX strategy at RBC.

Analysts at Rabobank said they had lowered their target for euro versus the dollar to 1.15.

“While dollar strength is still a factor, euro weakness is against a large part of the story,” said the bank in a note to clients. (Editing by Andrew Heavens, editing by Larry King)

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