Dollar advances amid caution over U.S.-China trade talks

By Gertrude Chavez-Dreyfuss

NEW YORK (Reuters) - The safe-haven dollar rose from a three-week low on Wednesday, as investors grew cautious about U.S. trade talks with China after the country's trade representative said there are still serious issues to work through to secure a deal and ensure that future agreements are met.

The greenback was trading lower before Trade Representative Robert Lighthizer made his comments before the House Ways and Means Committee on Wednesday at a hearing on U.S.-China issues.

Lighthizer detailed a long road ahead to overhaul trade dealings between the world's two biggest economies.

"FX in general is a little bit more cautious," said Mazen Issa, senior FX strategist, at TD Securities in New York. "While it appears that the U.S. and China are moving closer to some sort of trade truce, perhaps it's in name only."

The greenback's outlook, however, remained negative after Federal Reserve Chairman Jerome Powell emphasized patience on raising U.S. interest rates in two days of testimony before the U.S. Congress.

Money markets have ruled out rate hikes for the remainder of the year with an 80-percent probability of a rate cut by early 2020.

"The tone of the Fed doesn't give much impetus for the dollar to outperform," said TD's Issa.

John Higgins, chief market economist at Capital Economics, believes the dollar will continue to benefit from safe-haven flows this year even though investors start to price in rate cuts in 2020.

He cited the slowing U.S. economy, which could pressure the stock market again.

"Big corrections in equity prices - our forecast is that the S&P 500 will end this year about 18 percent below its level now - have often given the U.S. dollar a boost in the past," Higgins said.

In afternoon trading, the dollar index was up 0.2 percent at 96.166 , after falling to a three-week low.

The euro was down 0.2 percent at $1.1366 , while the dollar rose 0.2 percent versus the yen to 110.825.

U.S. economic data were mixed overall on Wednesday, backing expectations the Fed will be on hold throughout the year.

The yen and Swiss franc earlier gained after Pakistan said it had shot down two Indian jets, sending investors out of riskier markets and into safer assets. The Japanese and Swiss currencies both tend to appreciate during bouts of political and economic uncertainty.

Pakistan said it downed the planes a day after Indian warplanes struck inside its territory for the first time since a war in 1971.

Elsewhere, investors watched sterling closely as it rose above $1.33 for the first time in five months. It was last up 0.4 percent at $1.3302.

The pound had rallied on Tuesday after British Prime Minister Theresa May offered lawmakers the chance to vote on delaying Brexit, raising the chance of avoiding a chaotic no-deal departure from the European Union.

(Reporting by Gertrude Chavez-Dreyfuss in New York; Additional reporting by Tom Finn in London; Editing by Nick Zieminski and James Dalgleish)

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