FOREX-Dollar pinned near 7-week lows as trade war heats up

* Dollar weakness jars with previous bouts of trade conflict
* Euro holds gains as markets cautiously optimistic
* Chinese stocks gain, currency steady as Beijing reply eyed

By Saikat Chatterjee

LONDON, Sept 18 (Reuters) - The dollar held near seven-week lows against its rivals on Tuesday while riskier currencies gained after U.S. President Donald Trump escalated his trade war with China by imposing 10 percent tariffs on about $200 billion worth of Chinese imports.

While the greenback has benefited from safe-haven flows amid the escalating Sino-U.S. trade conflict in recent months, the rare spot of weakness in the dollar overnight raised concerns about whether investors are starting to worry about the broader impact of the tariffs on the U.S. economy.

With the latest U.S. moves widely anticipated by global markets, investors awaited the Chinese response to the latest measures and pushed the dollar below a key technical level, potentially opening the door to more losses. "Unless we see these trade wars start hitting the U.S. consumer directly, this might continue further and we will have to see what the Chinese response will be," said Talib Sheikh, head of multi-asset strategy at Jupiter Asset Management.

The dollar index popped up to 94.607 in the early Asian session but gave up its gains to turn lower on the day. It stabilised at 94.57 after falling to 94.35, its lowest since the end of July.

With Beijing keeping a firm grip on the renminbi in the aftermath of the latest measures and refusing to let it weaken sharply, sentiment was more optimistic towards emerging market currencies and equities.

Stocks in China ended up nearly 2 percent.

"China is playing a steady hand on the currency front and the news flow out of Europe continues to be positive, which is helping European currencies," said Alvin Tan, a currency strategist at Societe Generale in London.

Sweden's first rate hike since July 2011 is inching closer, with the central bank's board giving broader backing for policy tightening in the months ahead, according to minutes published on Monday. Norway, meanwhile, is set to raise interest rates this week. Against the euro, the dollar fell 0.1 percent to $1.1717 while the Swiss franc was trading at a six-month high against the dollar at 96.05 cents before a central bank rate decision this week from Switzerland where markets expect policymakers to hold rates.

Even Australia, which has been vulnerable due to the escalating trade conflict, saw its currency bounce 0.3 percent as investors covered some of their short positions.

Only the Japanese yen weakened against the dollar, retreating to a two-month low at 112.27 yen.

On technicals, the outlook is cautious for the dollar after it fell below a 100-day moving average for the first time in six months overnight, or roughly around the time period when concerns about trade wars hit the spotlight.

China's yuan traded in the offshore market a shade stronger at 6.8931 per dollar, though Chinese stocks managed just slim gains.

(Reporting by Saikat Chatterjee with additional reporting by Shinichi Saoshiro in Tokyo Editing by Mark Heinrich)

Reuters Messaging: saikat.chatterjee.reuters.com@reuters.net))

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