Dollar and euro drift, yen slips as markets seek direction

By Gregor Stuart Hunter

SINGAPORE, Oct 20 (Reuters) - The US dollar churned at the start of trading in Asia on Tuesday as a tepid recovery in investor confidence bolstered higher-yielding currencies, but growing political risk in Europe continued to test traders' nerves.

The euro was steady at $1.1216, while the British pound rose 0.1% to $1.3308. The Australian dollar was up 0.1% at $0.6986, while its New Zealand counterpart nudged 0.1% higher to $0.5668.

Against the yen , the US dollar was flat at 158.56 yen ahead of an auction of 20-year Japanese government bonds.

"FX markets reflected the improvement in risk appetite, with higher-carry currencies finding buyers," said Chris Weston, head of research at Pepperstone Group in Melbourne.

"Europe was less convincing," Weston said. "French sovereign risk is clearly being priced into European equities, but the euro's resilience suggests traders aren't yet treating it as a systemic European problem."

French authorities set curfews in several cities on Monday after nationwide anti-government protests plunged President Emmanuel Macron’s final months in office into turmoil.

In Italy, the government said it will dispatch 500 troops after two days of unrest.

"The spread of French government bonds over Germany has come under renewed widening pressure against the backdrop of violent protests grabbing the headlines," ING analysts wrote in a client note.

"Tuesday will likely see more headlines around the 2027 budget, as (the French) Parliament is slated for a first formal vote on the revenue section of the finance bill."

The spread between French and German 10-year government bonds widened 9.9 basis points on Monday to 147.3 basis points. The yield on the US 10-year Treasury bond was flat at 5.131%.

The US dollar index , which measures the greenback's strength against six currencies, ended two days of loss on Monday, rising 0.2% to 101.98.

Against the Chinese yuan , the dollar was flat at 6.6811 yuan in offshore trade after the People's Bank of China kept interest rates on hold, in line with market expectations.

Bitcoin was flat at $81,906.58, while ether nudged 0.3% higher to $2,405.99.