By Tom Westbrook
SINGAPORE (Reuters) - The dollar drifted lower on Tuesday as investor appetite for higher risk currencies found support on a report of German stimulus plans, diminishing chances of a no-deal Brexit and hopes of a breakthrough in the Sino-U.S. trade war.
The mood lifted the Australian dollar to a six-week high of $0.6875 and the pound also hit a six-week high of $1.2385 as a British law blocking a no-deal exit from the European Union came into force.
The safe-haven yen touched a five-week low of 107.46 per dollar as risk appetite rose. Moves were modest in early Asian trade, however, with traders broadly remaining on the sidelines ahead of a key European Central Bank meeting on Thursday, at which policymakers are expected to ease monetary policy.
Investors also await Chinese inflation data due around 0130 GMT, which is expected to show another year-on-year decline in factory prices, adding to arguments for more central bank stimulus.
Ratings house Fitch on Tuesday cut growth forecasts for Europe and China citing rising protectionism.
Market hopes for a breakthrough rested on confidence overnight from U.S. Treasury Secretary Steven Mnuchin, who told Fox television that there had been "a lot of progress" on a U.S-China trade deal and that the U.S. side was "prepared to negotiate".
Tapas Strickland, a director of economics at National Australia Bank, said trade remained subdued with few drivers beyond Mnuchin's comments and the prospect of stimulus in Germany. However, the absence of any in immediately bad news for markets has helped sentiment.
"It was largely a case of 'Hakuna Matata' for markets," Strickland said, referring to a Swahili phrase meaning "no worries", made famous by the 1994 Disney film The Lion King.
The remarks pushed U.S. benchmark 10-year Treasuries (US10YT=RR) to a three-week high, where they held in early Asian trade.
The euro also rallied to as high as $1.0167 following a Reuters report that Germany may set up public investment agencies to boost fiscal stimulus without breaching national spending rules.
Sterling, meanwhile, barely shifted when Britain's parliament voted, as expected, to stymie Prime Minister Boris Johnson's bid for an early election, which prompted him to vow that he would secure a Brexit deal at an EU summit next month.
It sat just below its six-week peak at $1.2344 at 0005 GMT.
"While I am loath to go anywhere near the pound, I like what I see in the price action," said Chris Weston, head of research at Melbourne forex brokerage Pepperstone Group.
"If GBP/USD kicks up through $1.2354 again, I would be looking for longs, with a stop through $1.2234."
The Chinese yuan trod water in offshore trade to hold around 7.1140 per dollar ahead of the economic data.