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Dollar weakens as stock gains show improving risk sentiment

The U.S. dollar index dropped to more than two-week lows on Tuesday while emerging market currencies outperformed, as rising stock markets reflected improving risk appetite.

U.S. stocks opened higher, led by technology stocks, as upbeat earnings from blue-chip companies helped ease jitters over the impact of an ongoing U.S.-China trade war and other global issues on corporate profits.

It seems as if we have a risk on tone. Equity prices seem to be rising globally again and reversing a little bit of the panic that we saw last week, said Mark McCormick, North American head of FX strategy at TD Securities in Toronto.

The greenback was supported last week as benchmark 10-year Treasury yields surged to a seven-year high of 3.26 percent, while stocks tumbled. Yields are now consolidating at around 3.16 percent, reducing demand for the dollar.

The better risk tone on Tuesday also reduced demand for safe haven currencies the Japanese yen and Swiss franc. It's a lack of negative headlines today, which if anything else is just a change from what we've seen, said Erik Nelson, a currency strategist at Wells Fargo in New York.

The risk sensitive emerging currencies are particularly outperforming while the yen and the Swiss franc are on the soft side. Concerns about rising tensions between Western powers and Saudi Arabia weighed on markets on Monday.

Saudi Arabia has been under pressure since a prominent Saudi journalist Jamal Khashoggi, a critic of Riyadh and a U.S. resident, disappeared on Oct. 2 after visiting the Saudi consulate in Istanbul.

U.S. Secretary of State Mike Pompeo met Saudi Arabia's king and crown prince to discuss the disappearance of Khashoggi on Tuesday and Turkey's foreign minister said the envoy would bring information about the case to Ankara.

Data on Tuesday showed that U.S. industrial production increased for a fourth straight month in September, boosted by gains in manufacturing and mining output, but momentum slowed sharply in the third quarter.

The New Zealand dollar advanced against the greenback as the domestic inflation rate came in higher than expected in the third quarter.