FOREX-Soft German inflation data helps dollar gain on European currencies

By Gregor Stuart Hunter and Alun John

SINGAPORE/LONDON, Jan 6 (Reuters) - The U.S. dollar nudged higher against European peers on Tuesday, with the euro weighed down by softer inflation data, but moves were fairly muted with commodity and stock markets drawing most of the day's attention.

The euro was last down 0.2% at $1.1699, giving back early small gains after data showed inflation slowed more than expected in Germany and France in December. EUR=

That data sent European government bond yields down around 3 basis points, while Treasury yields were slightly higher on the day, a relative move that weighed on the common currency. GVD/EUR

Traders expect the European Central Bank to keep rates steady for all of this year, and if inflation continues to hold near its 2% target, it will have little reason to rush to hike.

The pound dropped in sympathy as traders thought British inflation data could follow a similar pattern, and was last down 0.17% at $1.13517, albeit after hitting a near four-month high against both the dollar and euro earlier in the day. GBP/

The impact of the shock U.S. capture of Venezuelan President Nicolas Maduro over the weekend was short-lived across most asset classes and particularly in currencies, while stocks are trading around record highs. MKTS/GLOB

"A little over 48 hours after the U.S. military operation in Venezuela, there are few marks left in the currency market. Early Monday's flight into dollar safety proved very short-lived," said Francesco Pesole, FX analyst at ING.

"The good performance of equities yesterday, despite geopolitical risk, was, in our view, the primary driver of the unwinding of earlier dollar gains," Pesole added.

With the dollar steady on the yen at 156.46, the dollar index =USD, which measures its strength against a basket of six currencies, was last trading at 98.42, up a touch on the day.

The index dropped slightly on Monday after U.S. data showed manufacturing activity had contracted more than expected in December and fallen to a 14-month low, and dovish comments from Minneapolis Federal Reserve President Neel Kashkari, a voter on the central bank's rate-setting committee this year, who told CNBC he sees a risk that the jobless rate could "pop" higher.

Expectations of policy easing edged up after his remarks, though Fed funds futures are still pricing around an 80% chance that interest rates will remain on hold at the U.S. central bank's next meeting on January 27 to 28, according to the CME Group's FedWatch tool.

Elsewhere, the Australian dollar, which is sensitive to global investor sentiment and often moves in line with stocks, has been outperforming, and hit an over one-year high of $0.6739 AUD= on Tuesday.

Against the Chinese yuan trading offshore in Hong Kong CNH=, the U.S. dollar was last down marginally at 6.983 yuan.

With the optimism around global stocks, the safe-haven Swiss franc struggled. The dollar was last up 0.18% on the franc at 0.7928 CHF=.