(Updates with comment, market moves, European CPI)
* G20 summit kicks off in Argentina on Friday
* Trump, Xi expected to meet Saturday
* Any easing of trade tensions to weigh on dollar
* Graphic: World FX rates in 2018 tmsnrt.rs/2egbfVh
By Dhara Ranasinghe
LONDON, Nov 30 (Reuters) - The dollar strengthened on Friday, as markets nervously awaited the outcome of talks between the leaders of the world’s two biggest economies this weekend which could determine whether trade tensions between them will escalate further.
The discussions could also determine the direction of the U.S. currency, which has gained more than 5 percent against its rivals this year on concerns that rising trade tensions will hurt world economic growth and boost its safe-haven appeal.
U.S. President Donald Trump and China’s President Xi Jinping are expected to meet at a G20 summit in Buenos Aires which kicks off on Friday, discussing contentious trade matters which could also impact currencies such as the trade-sensitive Australian and New Zealand dollars.
Heading into the weekend, investors appeared to favour holding the U.S. currency — the euro was down a third of a percent at $1.13626 while the dollar was a touch firmer at 113.53 yen.
The Australian dollar slipped a third of a percent to $0.7299, down from three-month highs hit against a broadly-softer greenback on Thursday.
Sterling was almost 0.4 percent weaker at $1.2752.
“I’m sceptical that anything more than ‘positive discussions’ or something similar will come from the meeting, which could support the dollar and push the Chinese yuan back towards the all-important seven handle,” said Craig Erlam, senior markets analyst at OANDA in London.
The U.S./China trade tensions have taken a toll on the Chinese yuan, which Credit Suisse strategists expect to weaken to a decade low of 7.20 per dollar by end-2019.
Data on Friday showed growth in China’s vast manufacturing sector stalled for the first time in over two years in November as new orders slowed, piling pressure on Beijing ahead of the Trump-Xi meeting this weekend.
Trump has said he plans to significantly increase the current 10 percent tariffs on Chinese imports by January next year, which would sharply escalate the trade war between the economic heavyweights and shave nearly a percentage point off global growth in 2019, according to economists.
The dollar index was 0.2 percent firmer at 96.99 — off almost one-week lows of 96.626 hit on Thursday after comments this week from Federal Reserve chief Jerome Powell which prompted investors to question whether the U.S. central bank is nearing the end of its rate-hiking cycle.
A scaling back of U.S. rate expectations in recent weeks leaves the dollar index, which measures the value of the greenback against a basket of other major currencies, down 0.13 percent in November and set for the biggest monthly fall since July.
Interest rate futures traders price in just one rate hike in 2019, according to the CME Group’s FedWatch Tool, below Fed projections of three increases during the year.
“There’s no denying that the Fed rhetoric has changed in recent weeks, but we don’t think it’s changed quite as much as the repricing in rates suggests it has,” said Adam Cole, chief currency strategist at RBC Capital Markets in London.
“Bigger picture, we are constructive on the dollar.”
Data on Friday showed euro zone inflation slowed as expected in November, cementing expectations that interest rates in the single currency bloc are likely to remain on hold for some time.
Elsewhere, there was focus on whether OPEC and Russia can agree on oil production cuts next week.
A meaningful rebound in crude prices can be beneficial for commodity currencies such as the Canadian dollar and Norwegian crown, analysts said.
Reporting by Dhara Ranasinghe; Editing by Kirsten Donovan