LONDON - The dollar held just below a 16-month high versus the euro on Tuesday, while the yuan reached its strongest in more than five months as markets welcomed dialogue between the US and Chinese presidents.
US President Joe Biden and Chinese leader Xi Jinping stressed their responsibility to the world to avoid conflict, in talks that gave Asian currencies a lift overnight. But support for riskier currencies ebbed somewhat as the talks did not appear to lead to any particular breakthrough.
The dollar hit a five-month low against China's offshore yuan overnight, at 6.3615, and the pair was still down around 0.1 percent on the day at 0850 GMT, at 6.3767.
But the Australian dollar - seen as a liquid proxy for risk appetite - had lost its overnight gains by early European trading, down 0.1 percent on the day at $0.73425.
The dollar index was a touch lower at 95.446, having rallied to its highest in 16 months after US inflation data last week showed consumer prices surged to their highest rate since 1990, fuelling speculation that the Federal Reserve may raise interest rates sooner than expected.
Investors are waiting for US retail sales data due later in the session, which could also influence the outlook for interest rates.
The euro was little changed on the day, having extended recent losses on Monday after dovish comments from European Central Bank President Christine Lagarde.
Lagarde said that tightening monetary policy now to rein in inflation could choke off the euro zone's recovery, comments which were viewed as pushing back on calls and market bets for tighter policy.
"Even if lower-than-consensus economic data are released this afternoon in the US, including retail sales and industrial production, we doubt that this is likely to alter the scenario now that selling EUR-USD into rally remains favored," UniCredit strategists wrote in a client note.
Analysts also said that rising COVID-19 cases in Europe were hurting European currencies including the euro.
On Monday Austria imposed a lockdown on unvaccinated people, while Germany's parliament is due to vote on Thursday on stricter measures to deal with surging cases. France, the Netherlands and many countries in Eastern Europe are also experiencing a surge in infections.
"The fear that the situation could escalate and result in a more significant tightening of restrictions in the coming months is hurting sentiment towards European currencies," MUFG currency analyst Lee Hardman said in a client note.
The British pound was up 0.4 percent against the dollar at $1.3467, having risen after data showed British employers hired more people in October after the government's job-protecting furlough scheme ended.
The Swedish crown was up around 0.2 percent against the dollar at 8.789. Swedish headline inflation hit its fastest pace since 2008 in October, data on Monday showed.
"We assume that the Riksbank will call the rise in inflation temporary at its meeting next week," wrote Commerzbank FX and EM analyst You-Na Park-Heger in a client note.
Elsewhere, the cryptocurrency bitcoin was down around 4.5 percent on the day, at $60,750.
(Reporting by Elizabeth Howcroft; Editing by Giles Elgood)