Dollar rally pauses after strong run, rivals seek tentative recovery

By Julien Ponthus

LONDON (Reuters) - The dollar eased for a third straight day on Tuesday as investors cautiously trimmed bets on a rally which sent the greenback to a two-decade high last week.

The currency's strength is widely expected to remain a driving force across financial markets in 2022 as the U.S. Federal Reserve implements a new cycle of monetary tightening.

Fed speakers on Tuesday, including Chairman Jerome Powell at 1800 GMT, will be closely watched for any clues about whether near-term rate expectations could become even more aggressive.

The U.S. currency's breather pushed the dollar index down 0.39% to 103.76, more than 1% below last week's two-decade high of 105.010.

"The dollar pulled back after a very strong run of gains, it's mostly stabilising at a high level," commented Lee Hardman, a currency analyst at MUFG Bank.

Hardman argued it was difficult to see a shift in the fundamentals that are lifting the dollar amid worries about global economic growth.

"The key driver is that the U.S. economy is outperforming the rest of the world", he said, pointing to worries about the euro zone and China in particular.

Data showed consumption and factory output in world's second biggest economy fell in April at a pace unseen since early 2020, when the Wuhan coronavirus outbreak became a pandemic.

The Chinese offshore yuan gained 0.6% after a steep slide that has knocked it about 7% lower since mid-April. It last traded at 6.7556 per dollar.

Shanghai logged three consecutive days with no new COVID-19 cases outside quarantine zones on Tuesday, a milestone that in other cities has signalled the beginning of lifting restrictions.

The euro rose 0.4% to $1.0476 a day after European Central Bank policymaker Francois Villeroy de Galhau said a weak euro threatened price stability in the currency bloc.

Worries that escalating tensions with Russia could lead to a gas embargo, a recession in the euro zone and prevent the ECB from lifting interest rates are however weighing on the common currency's prospects.

"There is undoubtedly a risk that the ECB might have to delay its lift-off in the end or that it will not hike interest rates as much as it currently seems willing to do", Commerzbank analyst You-Na Park-Heger wrote in a morning note.

The Australian dollar jumped 0.8% to $0.70305, recovering further from a two-year low touched last week, and could get an extra boost from interest rate expectations if wage data beats expectations on Wednesday.

Australia's central bank considered a sharper rise in interest rates at its May meeting, minutes published on Tuesday showed, in a heavy hint it will hike again in June.

The yen was 0.24% lower at 129.41 per dollar, holding above a two-decade trough while Sterling jumped 1.2% to $1.2469.

(Reporting by Julien Ponthus and Tom Westbrook; Editing by Kirsten Donovan)