The euro was doing its best to bounce after six straight sessions of selling, but at $1.0855, it was not terribly far from Monday’s trough of $1.0806.

The common currency is down 4% on the dollar since Russia launched what it calls a “special military operation” in Ukraine where fighting is showing no signs of abating. It flirted with parity on the Swiss franc on Monday for the first time in seven years.

Euro eyes void below parity vs Swiss franc on stagflation shock

Russia-Ukraine Peace talks have made scant progress and though Germany’s opposition to a ban on Russian energy imports knocked oil futures from Monday’s 14-year peak, analysts expect the supply shock to hurt European growth.

“Markets could continue to price the risk of a disruption to Russian energy exports and downgrade the European growth outlook,” said Commonwealth Bank of Australia strategist Carol Kong.

“As such, we expect the euro to remain under pressure. There is a reasonable chance euro/dollar tests the pandemic low of $1.0688 this month.”

The European Central Bank meets on Thursday with the spectre of stagflation prompting economists to figure that policymakers might delay rate hikes until late in the year.

Besides commodities’ parabolic rally the conflict and subsequent sanctions have crushed Russian assets, with the rouble sliding to a record low of 160 to the dollar in erratic offshore trade on Monday.

Elsewhere the US dollar was firm amid nerves the war and its economic consequences could spread.

Surging oil import costs already pushed Japan to its largest currency account deficit since 2014, knocking some of the lustre from yen as a safe-haven.

The yen fell overnight and was a little lower still at 115.48 per dollar on Tuesday.

The Australian and New Zealand dollars were each up about 0.4% in early trade, but were below four-month highs made with soaring oil prices on Monday. The Aussie was last at $0.7343, about a cent underneath Monday’s top.

The kiwi bought $0.6847. It is up 4.5% in just over a month as the Reserve Bank of New Zealand’s hiking cycle gathers pace.

ANZ Bank analysts said on Tuesday that energy price pressure can drive back-to-back 50-basis-point hikes in April and May.

Both the onshore and offshore yuan jumped, with the onshore spot price hitting a high of 6.3666 per dollar before ending domestic trading session at 6.3770, the strongest such close since June 1, up 0.11% from previous late night close.

Its offshore counterpart also leapt to 6.3616 at one point, the highest since June 1.

Currency traders said the meeting between Biden and Xi offered signs of improvements in bilateral relations and chances of partial tariff removals.

"The virtual summit was only meant to ease tension. It was not intended to achieve normalisation of the bilateral relationship," said Raymond Yeung, China economist at ANZ.

"The summit paves the way for subsequent trade negotiations, during which the U.S. may soften its trade measures against China."

Trade disputes between the world's two largest economies have been one of the key factors influencing the yuan and broad financial market sentiment over the last few years.

"I think the (U.S.) president and his secretary of state are beginning to find channels through which agreement can be reached," said Carl Tannenbaum, chief economist at Northern Trust.

"And in fact it was just last week that some contemplation of reducing tariffs against China was floated by Washington, and that was eagerly received in Beijing. So I want to be careful and not be overoptimistic."

Yuan slips against dollar

The Biden administration was getting traction with China in talks over Beijing's compliance with a Trump-era trade deal, U.S. Trade Representative Katherine Tai said last week, but she declined to predict an outcome while discussions continue.

"The possibility of substantial improvement in Sino-U.S. relations within this year is not high," Marco Sun, chief financial markets analyst at MUFG Bank, said, expecting the yuan to consolidate on the firmer side of 6.4 per dollar in the near term.

The dollar index, which measures the currency against six peers, eased 0.13% to 95.012 from Friday, when it posted its biggest weekly gain since mid-August and touched 95.266 for the first time since July 2020.

Investors will also be watching any comments coming out of a virtual summit between President Biden and Chinese leader Xi Jinping, set for Tuesday morning Beijing time and Monday evening in Washington, with relations between the world's two largest economies strained over a range of issues.

Otherwise, the main event on the U.S. economic calendar this week will be Tuesday's retail sales data, particularly after a survey on Friday showed consumer confidence unexpectedly plunged to a decade low in early November as high inflation hit sentiment.

"It will be important to watch what still cashed-up U.S. consumers do rather than what they say," as readings of sentiment were at odds with actual spending during the summer, Ray Attrill, head of FX strategy at National Australia Bank in Sydney, wrote in a client note.

The dollar had been on a tear since Wednesday, when data showed a broad-based rise in U.S. consumer prices last month at the fastest annual pace since 1990, casting doubts on the Fed's stance that price pressure will be transitory.

Money markets were pricing a first rate increase by July and a high likelihood of another by November next year as of the end of last week.

Dollar holds firm ahead of US inflation data

The dollar index "has shifted into higher gears" following Wednesday's "blowout" inflation reading, with Fed stimulus tapering, President Joe Biden's infrastructure spending and a tightening labor market also providing a dollar-supportive backdrop, Westpac strategists wrote in a research note.

"Retail sales this week are likely firm as the economy consigns the Delta-driven soft patch to the rear view mirror," making any dips in the dollar index into the mid-93 level a buying opportunity, they said.

Gains in the heavily euro-weighted dollar index have also been helped by a droop in the single currency, with the European Central Bank appearing unlikely to change its extremely dovish policy settings in the near term against the backdrop of a slowing economy.

The euro added 0.13% to $1.1457, but still within sight of Friday's 16-month low of $1.1433.

Later on Monday, ECB president Christine Lagarde will speak before the Committee on Economic and Monetary Affairs of the European Parliament.

The dollar slipped 0.06% to 113.845 yen, consolidating around 114 since Wednesday.

Data on Monday showed Japan's economy shrunk much faster than economists predicted in the third quarter as supply disruptions hit exports and business spending plans.

Sterling rose 0.18% to $1.34355, continuing a recovery from this year's low of $1.3354, marked on Friday.

The risk-sensitive Australian dollar rose 0.18% to$0.743, supported by better-than-expected Chinese retail sales and industrial output readings on Monday.

The Aussie was up 0.19% at $0.7344, the highest since Nov. 10, taking back some of the lost ground last week but still far from its recent peak of $0.7555 of Oct. 28.

The kiwi dollar was similarly up 0.13% at $0.7050 after shedding 1.5% last week. The currency faces immediate resistance at the $0.7176 level and support around $0.6996.

The risk-sensitive currencies had been hit by concerns about slowdown in China, their biggest export market, and by strength in the U.S. dollar, which had benefited from bets of earlier than expected rate hikes by the Federal Reserve.

China's industrial output and retail sales in October handily beat forecast, growing 3.5% and 4.9% respectively from the same period a year ago.

The dollar index was down 0.12% at 95.015 after falling as low as 94.991 in response to a dip in consumer sentiment due to high inflation worries.

While Fed officials have sounded increasingly worried that inflation might prove long lasting, the Reserve Bank of Australia (RBA) is sticking to its dovish outlook for rates.

Australia dollar gains, bonds buckle as market guns for rate hikes

On that basis strategists don't expect the Aussie dollar will be able to build on its gains this week when the RBA is due to deliver a speech titled "Recent Trends in Inflation" on Tuesday, which will be followed by key quarterly wages data Wednesday.

"We still see room for RBA rate hike expectations to adjust lower which is a headwind to AUD ...(and) Q3 2021 wage price index could cause some AUD volatility on Wednesday," Commonwealth Bank of Australia strategists told clients in a note.

"The Governor is likely to remind listeners that wages growth is still much softer in Australia compared to some other advanced economies."

Bond prices were higher on Monday, pushing the 10-year bond benchmark three basis points lower to 1.77%, and three-year bond yields five basis points lower to 0.98%.

New Zealand yields were between one and two basis points lower across the curve.

Traders said the main focus would be a virtual meeting between US President Joe Biden and his counterpart Xi Jinping on Tuesday, with some investors raising their bets for partial removal of tariffs.

"If Sino-US relations improve further, the yuan will continue strengthening," said Li Liuyang, chief currency analyst at China Merchants Bank, though he added that 6.35 per dollar could provide strong resistance for the yuan in the near-term.

Prior to market opening, the People's Bank of China (PBOC) set the midpoint rate at 6.3896 per dollar, 169 pips or 0.26% firmer than the previous fix of 6.4065, the strongest since Oct. 27.

The firmer official guidance pushed the yuan's value against it major trading partners to 101.33, the highest level since Dec. 18, 2015, according to Reuters calculations based on official data.

Until this year a reading of 98 on the trade-weighted CFETS yuan basket index was "about the maximum we thought the government would tolerate" said Arthur Kroeber, head of research at Gavekal, speaking at a briefing in Shanghai.

"(But) exports are very strong and capital inflows seem to be decent ... so we're not looking at a situation where there's massive depreciation."

In the spot market, the onshore yuan opened at 6.3798 per dollar and was changing hands at 6.3821 at midday, not far from a high of 6.3782 hit on Oct. 25.

China's yuan eases after regulator warn of possible actions to counter higher fluctuations

Relations between Beijing and Washington have been one of the key factors influencing the yuan over the past few years, analysts and traders said.

The US-China trade talks, along with optimism about a pause in China's regulatory clampdown and a potential pick-up of bond inflows could support the yuan in the near term, HSBC said.

"However, assuming that there will not be a dramatic shift in US-China relations, we doubt that USD/RMB and the DXY index can keep diverging from each other," analysts at the US investment bank said in a note, adding that the yuan already appeared to be slightly overvalued.

"We believe China has been subtly leaning against the RMB's outperformance, via the fixings for instance," they added, expecting the yuan to trade at 6.4 at end-2021.

On the macroeconomic data front, China's industrial output grew at a surprisingly faster pace in October, despite fresh curbs to control COVID-19 outbreaks and supply shortages that have threatened to undercut the recovery in the world's second-largest economy.

"Even as supply side pressures should continue to ease, we expect year-on-year growth in industry and the wider economy to slow further in Q4 and early 2022 amid the real estate slowdown and impact of the current wave of COVID outbreaks," said Louis Kuijs, head of Asia economics at Oxford Economics.

"In response, we expect policymakers to take more easing measures to prevent growth from falling too much; the impact should largely kick in early next year."

By midday, the broad dollar index stood at 95.012, while the offshore yuan was trading at 6.378 per dollar.