Dollar rises on firmer U.S. yields; yuan struggles

LONDON (Reuters) - The dollar edged higher on Tuesday as firmer U.S. Treasury yields encouraged investors to buy the greenback after a recent drop with investors growing more bullish about its short-term outlook, especially against emerging market currencies.

While the dollar has struggled to extend gains against the euro and the sterling in recent days, it has strengthened against its emerging market counterparts and pinned the Chinese yuan to a two-month low.

"The dollar's outlook continues to be strong against emerging market currencies due to more expected U.S. rate hikes and the trade conflict between the U.S. and China," said Piotr Matys, a currency strategist at Rabobank in London.

Against a basket of its rivals (=USD), the dollar rose 0.1 percent at 95.13. It has fallen 1.2 percent in the last eight sessions to a three-week low.

But an emerging market currency index (MIEM00000CUS) was holding near its lowest levels in 1-1/2 years, indicating the divergence of the dollar's performance against its peers.

The euro (EUR=EBS) remained broadly on the back foot, holding around $1.1573 against the greenback after the Italian cabinet on Monday signed off on an expansionary 2019 budget to set up a showdown with authorities in Brussels over compliance with EU rules.

The New Zealand dollar advanced 0.24 percent versus the U.S. one to trade at 0.6567 as the domestic inflation rate was higher than expected in the third quarter.

The Japanese yen weakened by 0.19 percent on Tuesday and changed hands at 111.97. The yen had hit a one-month high of 111.61 on Monday.

The Swiss franc weakened 0.17 percent versus the dollar to trade at 0.9886 on Tuesday, after tacking on 0.45 percent overnight.

Sterling was broadly steady at a one-week low as Brexit negotiations faltered before a crucial European Union summit this week.