U.S. dollar banknote and stock graph are seen in this illustration taken April 25, 2025. REUTERS/Dado Ruvic/Illustration/File Photo

By Ankur Banerjee

SINGAPORE (Reuters) -The U.S. dollar firmed on Tuesday as Washington and Beijing remained locked in trade talks that left investors on edge and hesitant in placing major bets while looking ahead to the U.S. inflation report later in the week.

Top officials from the world's two largest economies sought to defuse a bitter dispute that has widened from tariffs to restrictions over rare earths, with trade talks extending to a second day in London.

The talks come after U.S. President Donald Trump and his Chinese counterpart Xi Jinping spoke by phone last week and at a crucial time for both economies, which are showing signs of strain from Trump's cascade of tariff orders since January.

The lack of firm details despite positive sentiment from some officials and Trump meant the currency moves were mostly tepid.

The euro eased 0.17% to $1.14 and sterling was at $1.3543. The dollar index, which measures the U.S. currency against six key rivals, was 0.2% higher at 99.189, but remained near six-week lows it touched last week.

The index is down 8.7% this year as investors, worried about the impact of tariffs and trade tensions on the U.S. economy and growth, flee U.S. assets and look for alternatives.

"The extension of talks and some positive sound bites from the U.S. officials could offer short-term relief, markets are unlikely to buy into this optimism without real structural progress," said Charu Chanana, chief investment strategist at Saxo.

Washington and Beijing are trying to revive a temporary truce struck in Geneva that had briefly lowered trade tensions and calmed markets.

"Unlike the Geneva talks, where tariff relief provided easy wins, the London talks are now tackling thornier issues like chip export controls, rare earths, and student visas," said Chanana.

"These are long-term, strategic matters not easily resolved over a few days. That makes it harder to deliver a positive surprise."

The Australian dollar, often seen as a proxy for risk sentiment, was flat at $0.652, while the New Zealand dollar was a touch softer at $0.60425, but stayed close to the seven-month peak it hit last week. [AUD/]

The Japanese yen weakened after comments from Bank of Japan Governor Kazuo Ueda suggested the timing of the next interest rate hike could be pushed back. The BOJ is due to meet next week and is expected to stand pat on rates.

"Once we have more conviction that underlying inflation will approach 2% or hover around that level, we will continue to raise interest rates to adjust the degree of monetary support," Ueda told parliament.

While risks to Japan's export-heavy economy from Trump's tariffs have pushed backed market bets on the next rate-hike timing, investors are on the look-out for any clues from Ueda on how soon rate increases could resume.

The yen was last 0.2% weaker at 144.90 per dollar but has gained over 8% against the greenback this year on safe-haven flows during the market tumult unleashed by Trump's tariff chaos.

"While the timing of BOJ policy normalisation may be deferred," it is not derailed, said Christopher Wong, a currency strategist at OCBC in Singapore.

Wong said the policy divergence between the BOJ and the Federal Reserve and dollar diversification theme should help the yen strengthen in the near term.

Investor focus this week will be on the consumer price index report for May, due on Wednesday. The report could give insight into the tariff impact at a time investors are wary of any flare-ups in inflation ahead of the Fed's policy meeting next week.

OCBC's Wong said the inflation data may be a binary risk. "A firmer print may lead to further upticks in dollar/yen but an underwhelming print should see dollar/yen trade lower."

The U.S. central bank is widely expected to hold rates steady, with Fed officials having signalled that they are in no rush to cut rates. Traders are pricing in nearly two 25-basis point cuts by the end of the year.

(Reporting by Ankur Banerjee in Singapore; Editing by Sam Holmes and Shri Navaratnam)