Dollar steadies as markets look beyond Trump's policy stumble

By Vikram Subhedar

LONDON (Reuters) - Stocks recovered while the dollar hovered above four-month lows on Tuesday as anxiety over Donald Trump's setback on healthcare reform gave way to tentative hopes for the U.S. president's planned stimulus policies.

Hopes that the Trump administration will now prioritize tax reforms coupled with still-robust economic data and corporate earnings forecasts spurred some investors to look past creeping doubts about Trump's ability to deliver on campaign promises.

The dollar index against a basket of major currencies was trading almost half a percent above Monday's four-and-a-half month low at 99.252, but up just 0.1 percent on the day after a volatile session in Asia.

Europe's STOXX 600 rose 0.1 percent helped by financials and pharmaceutical stocks. Stock futures on Wall Street were little changed.

"Risky asset markets have rebounded from yesterday's opening low, supporting our view of the current market setback as a risk pause and not a turning point towards generally lower risk valuations," analysts at Morgan Stanley said in a note to clients.

The Trump administration's failure to undo Obamacare raised concern among investors that planned tax reforms face a rockier road though Congress. The White House said it would take the lead in crafting legislation to overhaul the tax code, adding: "We're going to work with Congress on this."

Morgan Stanley said that given some of the savings that were to come from replacing Obamacare would be lost, the upcoming tax reform may turn out to be a smaller package or result in a higher fiscal deficit.

Talk of more rises in Federal Reserve interest rates this year helped halt the dollar's slide after its worst week since Trump's election.

Analysts said appearances by Dallas Federal Reserve Bank President Robert Kaplan and Chicago Fed chief Charles Evans that put the emphasis back on the prospect of more rises in U.S. interest rates gave support to the U.S. currency.

"Clearly we shouldn't forget we are going to see at least two more hikes by the Fed this year and that there is still the potential for the next one to be pulled forward to June," said CIBC strategist Jeremy Stretch.

Sterling traded within a narrow range as Britain prepared to start formal divorce proceedings with the European Union on Wednesday.

In emerging markets, the South African rand and government bonds extended losses, trading down 1.9 percent, after Finance Minister Pravin Gordhan was ordered home by the president, triggering speculation of an imminent cabinet reshuffle.

Recent weakness in the dollar and supply disruption in Libya underpinned crude oil prices.

Prices for front-month Brent crude futures, the international benchmark for oil, were up 0.7 percent. In the United States, West Texas Intermediate (WTI) crude futures rose 0.8 percent.

(Additional reporting by Patrick Graham; editing by Richard Lough and)