By Tom Westbrook
SINGAPORE (Reuters) - The dollar was kept on the back foot on Tuesday by strength in the Chinese yuan and other currencies sensitive to China's growth, as markets clung to hopes that China's restrictive zero-tolerance approach to COVID-19 will eventually ease.
The yuan had its best day in two years on Friday and managed to hold most of its gains through a choppy Monday. It was firm at 7.2200 per dollar in offshore trade on Tuesday.
The euro, linked via German exports to China's economy, regained parity on the dollar overnight and hovered at $1.0026. The New Zealand dollar climbed 0.2% to touch a seven-week high of $0.5951 in early Asia trade.
U.S. voters go to the polls in midterm elections later in the day, with a Republican victory and consequently gridlock in Congress forecast. A conclusive result could take days, but is unlikely to move currency markets if it meets expectations.
China's strict virus policy includes lockdowns, quarantining and rigorous testing, and officials said over the weekend the measures are "completely correct" and will stay. But incremental adjustments have been enough to keep traders' hopes alive.
"Where there's smoke, eventually there's fire, so the market is pricing in improved optimism, though at the moment it's all based on hopes," said Rodrigo Catril, senior currency strategist at National Australia Bank in Sydney.
"It's very CNY and pro-growth supportive," he said.
"This idea that maybe in 2023, we'll see a gradual reopening in China means that growth prospects in China should improve significantly, against a backdrop where most expect the U.S. economy to start slowing down."
The growth-sensitive Australian dollar is up two sessions in a row and last bought $0.6486, within range of its 50-day moving average at $0.6516.
The South Korean won rose 1%.
The Japanese yen hit a one-week high of 146.35 per dollar. Japanese foreign currency reserves posted the second-sharpest monthly decline on record in October as authorities spent 6.35 trillion yen intervening to support the yen.
Bank of Japan policymakers debated the need to look out for the side-effects of prolonged monetary easing and the potential impact of a future exit from ultra-low interest rates, a summary of opinions at their October policy meeting showed on Tuesday.
Sterling held sharp overnight gains made as a disappointing auction lifted gilt yields a bit. It was last at $1.1531, though traders are wary of chasing it too much higher ahead of a fiscal update expected on Nov. 17.
Currency bid prices at 0045 GMT
Description RIC Last U.S. Close Pct Change YTD Pct High Bid Low Bid
$1.0031 $1.0017 +0.14% -11.76% +1.0031 +1.0014
146.3300 146.4950 -0.09% +0.00% +146.7050 +146.3600
146.78 146.91 -0.09% +12.63% +146.9800 +146.7600
0.9877 0.9887 -0.06% +8.33% +0.9891 +0.9880
1.1535 1.1516 +0.17% -14.70% +1.1535 +1.1507
1.3479 1.3492 -0.10% +6.60% +1.3498 +1.3478
0.6490 0.6482 +0.14% -10.71% +0.6490 +0.6472
Dollar/Dollar 0.5948 0.5941 +0.14% -13.08% +0.5952 +0.5938
Tokyo Forex market info from BOJ
(Reporting by Tom Westbrook; Editing by Stephen Coates)