Dollar steady in early trade, yuan in focus again

By Lisa Twaronite

TOKYO (Reuters) - The dollar enjoyed some respite from recent volatility as it stuck to overnight levels in early Asian trade on Tuesday, holding above a more than four-month low against the yen and not far from a 5-1/2-year high against sterling.

Investors' focus remained on the mid-point fixing for China's yuan at 0115 GMT, after the central People's Bank of China set its daily midpoint rate higher for a second day on Monday, following eight straight sessions in which it allowed the yuan to weaken.

China's central bank plans to keep the yuan basically stable against a basket of currencies, and fluctuations of the Chinese currency against the U.S. dollar will increase, its chief economist Ma Jun said late on Monday on the central bank's website.

However, Ma added that the yuan will not be strictly pegged to a currency basket, either, though no details were given.

The Australian dollar, often used as a proxy for China plays because of the two countries' massive trade, was down about 0.1 percent at $0.6984 , remaining above a four-month low of $0.6927 touched on Monday.

The dollar was steady from late North American trade at 117.70 , after plumbing a low of 116.70 on Monday, its deepest nadir since Aug. 24.

The euro was also steady at $1.0855 .

Sterling stood at $1.4537 , nursing losses after a plunge to a 5-1/2-year low of $1.4491 on Monday, amid expectations that the Bank of England is in no rush to tighten policy when it meets on Thursday.

"While no changes are expected from the central bank, the drop in energy prices and the volatility in the financial markets should make policymakers more nervous," said Kathy Lien, managing director of FX strategy at BK Asset Management.

"Low inflation has been a big problem for the BOE - although the weaker currency helps to ease some of that pain," she said in a note to clients.

Analysts polled by Reuters do not expect BOE policymakers to opt to increase interest rates for the first time in more than eight years until the second quarter of this year. But some market participants expect the central bank to hold off even longer and refrain from hiking this year.

The BOE is seen eventually hiking its benchmark bank rate 25 basis points to 0.75 percent by the end of June, according to the consensus forecast, from a record low 0.50 percent that has stood since early 2009.

(Editing by Kim Coghill)