FOREX-US dollar flat to slightly lower as traders await China talks outcome

By Samuel Indyk and Gertrude Chavez-Dreyfuss

LONDON/NEW YORK, June 10 (Reuters) - The U.S. dollar was little changed to marginally lower on Tuesday, consolidating recent gains, as talks between Beijing and Washington continued for a second day amid expectations of a trade deal that could further ease trade tensions.

Sterling, on the other hand, slid against the greenback as British jobs data pointed to a weaker labor market.

Officials from the world's two largest economies were meeting in London to try to defuse a dispute that has widened from tariffs to restrictions over rare earths.

"The dollar was better bid last night in Europe and Asia and it has come off here so I think we're consolidating," said Marc Chandler, chief market strategist, at Bannockburn Forex in New York, until an outcome from the trade talks is announced.

He added that what's at stake in these negotiations are not just tariffs, but also export controls and "that's going to be the basis for the quid pro quo."

Chandler noted that there are the makings of a deal: U.S. semiconductor chips for China's magnets and rate earths. But what should be noted, he said, is the asymmetry. "China can replace the chips that the U.S. exports easier than we can replace their magnets and processed earths."

U.S. President Donald Trump and his Chinese counterpart Xi Jinping spoke by phone last week at a crucial time for both economies as signs of strain emerge from the former's cascade of tariff orders since January.

In late morning trading, the dollar was up slightly against the yen at 144.68 yen JPY=EBS, having lost more than 8.5% against the U.S. currency this year. The yen has been supported overall by safe-haven flows during the market tumult unleashed by Trump's tariff chaos.

The Bank of Japan is also expected to maintain borrowing costs at current levels at next week's policy meeting. Its governor, Kazuo Ueda, suggested on Tuesday that the timing of the next interest rate hike could be pushed back.

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

Sterling, meanwhile, slipped after UK jobs data implied further weakness in the labor market, which could influence how quickly the Bank of England cuts interest rates.

British wages rose by a slower-than-forecast 5.2% in the three months to April, pushing sterling GBP=D3 down 0.4% against the dollar to $1.3499.

The labor market data "puts a question mark on the hawkish bias that we've seen from the Bank of England," Danske Bank FX analyst Kirstine Kundby-Nielsen said.

The BoE is due to meet next week and is expected to keep the interest rate unchanged. Money market traders are pricing in about 48 basis points of cuts by year-end, up from about 39 bps before the data.

The dollar index =USD, which measures the U.S. currency against six others, was flat to slightly lower at 98.95, not far from a six-week low of 98.35 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, fled U.S. assets and looked for alternatives.

The euro, on the other hand, edged higher at $1.1432 EUR=EBS, while the Australian dollar AUD=D3, often seen as a proxy for risk sentiment, was up 0.1% at US$0.6527.AUD/

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

The U.S. central bank is also expected to hold rates steady next week, with traders pricing in nearly two 25 basis-point cuts by the end of the year.