Dollar gains for third day as risk outlook brightens

By Gertrude Chavez-Dreyfuss

NEW YORK (Reuters) - The dollar rose for a third straight session on Tuesday as gains on Wall Street and calmer financial markets enhanced appetite for currencies that offer higher yield.

The euro and the yen, currencies with low interest rates used by investors to fund purchases of higher-yielding currencies in risky carry trades, slipped on the day after strong gains seen in a chaotic first week of the year.

"Generally, stability in global markets should bode well for the greenback as it creates a backdrop against which the Fed can more likely follow through on expectations for four more lending rate hikes this year," said Omer Esiner, chief market analyst, at Commonwealth Foreign Exchange in Washington.

An initial recovery in crude oil prices helped temporarily wipe out early falls for the Norwegian crown and the Canadian, Australian and New Zealand dollars.

Investors remained cautious, however, despite a rebound in stocks. Attention remained fixed on the gyrations of China's yuan and a fall in oil prices to around $30 a barrel.

In late New York trading, the dollar was up 0.3 percent against a basket of currencies at 98.996.

The euro lost 0.1 percent versus the dollar to $1.0851 while the dollar was little changed at 117.68 yen.

Sterling fell 0.8 percent against the dollar to $1.4439 after the release of poor British manufacturing numbers. Earlier it hit a 5-1/2-year low as British industrial output in November suffered its sharpest fall since early 2013.

"The sharp risk-off environment has been playing a heightened role in the latest bout of sterling weakness," said ING in its latest research note. "The UK's large current account deficit means that sterling is one of the most vulnerable major currencies to any deterioration in risk sentiment."

In China, yuan offshore rates steadied, but their convergence with the officially controlled onshore market was driven by official moves to push implied overnight rates in Hong Kong as high as 94 percent. Fund investors, bankers and corporate sellers have taken a negative view on the yuan since late December. Chris Morrison, head of strategy at London-based Omni Partners' Macro Fund, has been betting against the yuan since the start of 2014. "The interest in this trade has just risen exponentially. I have received 50 emails per day on the RMB (yuan) in the last week," he said. "We saw that as a short-term reason to reduce our position size. There will be a consolidation."

(Reporting by Gertrude Chavez-Dreyfuss; Additional reporting by Patrick Graham; Editing by James Dalgleish)