Investing.com -- EUR/USD was relatively flat on Tuesday, equity markets in China stabilized and the timing of the Federal Reserve's next interest rate hike remained in focus.
The currency pair traded in a tight range between 1.082 and 1.0900, before closing at 1.0859, up 0.0003 or 0.02% on the session. After closing lower on each of the first two sessions of the new year, the euro has closed in the green in three of the last five trading days against the dollar. The euro is coming off a disappointing year when it plummeted approximately 10% against its American counterpart, amid sharp divergences in monetary policy between the Fed and the ECB.
EUR/USD likely gained support at 1.0538, the low from December 3 and was met with resistance at 1.1496, the high from Oct. 15.
In overnight trading, the Shanghai Composite index briefly fell under the 3,000 level before rallying late to close at 3,022.86, up 0.2% on the session. It came amid repeated efforts from the People's Bank of China (PBOC) to intervene in the offshore yuan market, Bloomberg reported. As a result, the offshore yuan in Hong Kong traded at 6.5850 against the dollar, while the Renminbi in Shanghai traded at 6.5767, ensuing in a 0.2% spread between the mainland and offshore currencies.
By comparison, the spread reached a record high of 2.9% last week as the PBOC devalued the mainland yuan sharply in an effort to bolster exports. While the PBOC strictly limits yuan trading in mainland China, there is more flexibility for currency traders in Hong Kong, where it can be bought and sold more freely. While the PBOC has considered letting the mainland yuan slide to the offshore level in recent months, the move has serious political and economic ramifications. Sharp devaluations in the yuan can increase capital outflows by investors away from China, creating further damage to the economy.
The U.S. Dollar Index, which measures the strength of the greenback versus a basket of six other major currencies, gained more than 0.3% to an intraday high of 99.34, before closing at 99.03. The index remains near 12-month highs from December, when it eclipsed 100.00. The yuan comprises nearly 20% of the basket, propping up the dollar when the Renminbi is devalued by the PBOC.
Elsewhere, International Monetary Fund managing director Christine Lagarde said at a Banque de France symposium in Paris that the Federal Reserve risks damaging a host of Emerging Market economies if it fails to raise interest rates gradually over the next year. As the Fed embarks on its first tightening cycle in a decade, Lagarde emphasized that any rate hikes should be accompanied by "clear evidence" of higher inflation in the U.S.
Earlier at the conference, Fed vice chair Stanley Fischer sent strong indications that the U.S. central bank would be making a mistake by reducing short-term interest rates below zero if another financial crises arises. Pushing rates into negative territory can destabilize money market funds by "breaking the buck," or simply shutting them down, Fischer noted. A number of central banks in Europe currently offer deposit rates in negative territory, including prominent ones in Sweden, Switzerland and Denmark.
Last week, Fischer indicated in an interview with CNBC that the Fed could raise interest rates as much as four times in 2016. Higher interest rates are viewed as bullish for the dollar, as foreign investors pile into the greenback in an effort to capitalize on higher yields.
The spread between U.S. and Germany government bond yields narrowed, as the U.S. 10-Year fell seven basis points to 2.10%, while yields on German 10-Year bunds inched down by one basis point to 0.53%. Last week, yields on U.S. 10-year Treasuries posted their strongest weekly decline since early-October.