By Gregor Stuart Hunter and Amanda Cooper SINGAPORE/LONDON (Reuters) -The dollar clawed steadily higher on Monday, as investors hoped the U.S. would temper its latest escalation of the trade war with China after Friday's selloff, while political developments in France and Japan undermined the euro and the yen. The dollar index, which measures the U.S. currency's performance against a basket of six others, was last up 0.2% at 99.2, recovering from declines late last week after U.S. President Donald Trump announced 100% tariffs on China. The broadside revived bad memories of Trump's Liberation Day rollout of sweeping tariffs in April and sparked a selloff in stocks and cryptocurrencies on Friday. TRUMP SOFTENS TONE "Certainly it's pretty nervous out there," said Tim Kelleher, head of institutional FX Sales at Commonwealth Bank in Auckland. "If you look at the U.S. and China stuff, it looks like Trump has done a bit of a TACO again and softened his tone," he added, referring to a trading adage that "Trump always chickens out." After announcing the 100% tariffs on Friday, Trump said on Sunday: "Don’t worry about China, it will all be fine! Highly respected President Xi just had a bad moment," he posted on the Truth Social network. "He doesn’t want Depression for his country, and neither do I. The U.S.A. wants to help China, not hurt it!!!" Market liquidity may be affected by holidays as parts of the U.S. observe Columbus Day/Indigenous Peoples' Day later on Monday, though stock exchanges remain open. Japan was closed on Monday to mark Health and Sports Day. The euro fell 0.3% to $1.1584, shrugging off the French presidency's announcement of Prime Minister Sebastien Lecornu's new cabinet lineup on Sunday, reappointing Roland Lescure, a close ally of Emmanuel Macron, as finance minister. Against the yen, the dollar rose 0.8% to 152.295 yen. Markets assessed the path ahead for new Liberal Democratic Party leader Sanae Takaichi after Komeito quit the ruling coalition on Friday, dealing a blow to her hopes of becoming the first female prime minister of the world's fourth-largest economy. Cryptocurrency markets fluctuated between gains and losses after a sharp selloff on Friday, with bitcoin last trading up 0.2% at $115,313. Gold hit a fresh record of $4,079.1 an ounce and was last up 1.5%. The offshore yuan recovered some stability to trade at 7.1416 per dollar, having reached a weak point of 7.144 overnight, after data showed China's export growth picked up pace in September. POSSIBLE CARRY TRADE IMPACT Even with sentiment on the up on Monday, analysts said the mood was fragile and currencies were likely prone to larger price swings. "As we saw earlier this year neither side can tolerate such high tariffs for long and the comments from President Trump over the weekend again point towards a path for de-escalation," MUFG strategist Lee Hardman said. "As a result, the trade threats may just contribute a more volatile FX market in the near-term and trigger some unwind of carry trades," he added. Traders will often borrow in a low-yielding currency to invest in a higher-yielder, known as a carry trade. The Japanese yen and Swiss franc have typically been funding currencies and took a harder knock than others on Monday. The Australian dollar, which tends to rally in a risk-on environment, rose 0.75% to $0.6521, making it the best-performing major currency against the dollar on Monday. The pound, a fellow risk-on currency, was flat at $1.3327. (Reporting by Gregor Stuart Hunter; Editing by Shri Navaratnam, Jamie Freed, Aidan Lewis)
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