Dollar gains on China optimism

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The dollar posted modest gains on Tuesday, as investor risk appetite improved on the back of rising oil prices and the expectation of further stimulus in China.

Data released overnight showed China's economic growth matched expectations but its growth rate for the year was slowest in 25 years, boosting expectations that monetary easing measures are imminent for the world's second-largest economy, possibly before Lunar New Year holidays in early February.

Chinese oil demand likely hit a record in 2015, data showed, which bolstered battered crude prices on Tuesday. Slumping oil prices have sapped risk appetite and sent traders scrambling for the safety of the Japanese yen in recent weeks.

The economic news helped boost China's Shanghai SE Composite Index 3.25 percent and provided some relief from worries about a global economic slowdown.

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While the news helped the dollar and pushed U.S. stocks up sharply on their open, analysts were quick to caution that it may not be the big turnaround dollar-long investors are hoping for.

"Today the Chinese stock market has spilled over and that coupled with high oil prices is helping lift the dollar bloc currencies and is weighing on the euro and the yen," said Marc Chandler, chief global currency strategist at Brown Brothers Harriman. "But I'd say it's still too early to say that this is a turn."

The dollar index, which measures the greenback against six major world currencies, gained 0.06 percent. The dollar also held near the flatline against the yen.

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The dollar had hit a five-month low of 116.51 on Friday and investors are still worried about global growth prospects, a factor expected to limit the yen's losses.

Sterling fell to a seven-year low against the dollar after Bank of England Governor Mark Carney said he had no "set timetable" for an interest rate increase. The pound reversed earlier gains and fell 0.75 percent against the dollar following Carney's remarks.

Speaking to an audience at the University of London, Carney said that the "adjustment" in China was not over and would restrict global growth and inflation for some time.

The pound has been a big loser since mid-December on softening economic outlook and worries over a British referendum on its membership in the European Union.