* Dollar buoyant with U.S. yields bouncing from 3-year lows
* Easing risk aversion weighs on yen, Swiss franc
* China sets new lending reference rate touch lower, yuan dips
* Graphic: World FX rates in 2019 tmsnrt.rs/2egbfVh (Adds details and quotes, updates prices)
By Shinichi Saoshiro
TOKYO, Aug 20 (Reuters) - The dollar hovered near a three-week high on Tuesday, as expectations policymakers around the world would unleash fresh stimulus drove an improvement in appetite for riskier assets and lifted U.S. government bond yields.
Yields on benchmark U.S. Treasuries pulled away from three-year lows, helped in part by the prospect of Germany ditching its balanced budget rule to boost spending and on more economic support measures by China.
China’s yuan was down 0.2% at 7.0661 per dollar in onshore trade against the broadly firmer greenback.
The yuan was also modestly pressured after the People’s Bank of China (PBOC) set its new lending rate slightly lower. It was the first publication of the benchmark since the PBOC announced interest rate reforms over the weekend designed to lower corporate borrowing costs.
“The dollar is higher across the board, tracking the rebound in yields. The prospect of Germany embarking on stimulus was the turning point and the dollar has regained momentum since,” said Yukio Ishizuki, senior currency strategist at Daiwa Securities.
The greenback traded little changed at 106.580 yen following three straight sessions of gains, having moved away from a seven-month low near 105.000 reached last week.
Against the Swiss franc, a currency sought in times of market turmoil and political tensions along with the yen, the dollar held near a two-week high of 0.9820 franc scaled overnight.
The euro was a shade higher at $1.1086, but it still held close to a two-week trough of $1.1066 set on Friday on lingering concerns over political developments in Italy.
Italy’s opposition Democratic Party has had good, initial contacts with the ruling 5-Star Movement over the possibility of forging a coalition, a PD source with knowledge of the talks said on Monday.
The 5-Star’s current coalition partner, the far-right League, has said it will present a no-confidence motion against Prime Minister Giuseppe Conte in an attempt to trigger a snap election and cash in on its surging popularity in the polls.
“The political situation in Italy remains unstable. In addition, expectations of Germany embarking on fiscal stimulus may in turn also heighten Italian fiscal concerns,” said Masafumi Yamamoto, chief forex strategist at Mizuho Securities.
The Australian dollar edged up 0.15% to $0.6776 after minutes of the Reserve Bank of Australia’s (RBA) August meeting suggested the central bank wasn’t in a hurry to cut rates again. While RBA is seen leaving the door open for further easing, analysts reckon the prospect of an immediate rate cut was limited.
Market focus will shift to the annual symposium of global central bankers starting on Friday at Jackson Hole, Wyoming.
Particular attention will centre on Fed Chairman Jerome Powell’s comments on monetary policy at a time when investors widely expect the Fed to cut rates again at its next meeting in September.
“A series of further rate cuts by the Fed has already been priced into the dollar. So the currency could gain a fresh boost if Powell does not sound as dovish as expected and clouds rate cut prospects,” Ishizuki at Daiwa Securities said. (Reporting by Shinichi Saoshiro; Editing by Sam Holmes & Shri Navaratnam)