Dollar drifts on Mideast, midterm risks; Aussie and yuan dip

By Alun John and Jiaxing Li

LONDON/HONG KONG, Nov 3 (Reuters) - The dollar eased on Tuesday as investors weighed uncertainty over US-Iran tensions and US midterm elections, while the Australian dollar and China's yuan came under pressure after domestic policy moves.

The euro rose 0.14% to $1.1201, the pound edged up 0.1% to $1.3421 and the Japanese yen was also a fraction stronger at 157.8 per dollar.

US midterm elections remain in focus, with polls and non-partisan analysts suggesting Democrats could retake the House of Representatives, while control of the Senate remains uncertain.

"The risk is domestic policymaking becomes more difficult ... if you can't agree anything when you're running a sizeable budget deficit and sizable spending, then the danger is you tighten fiscal policy, slow the economy and weaken the currency," said Kit Juckes, head of FX strategy at Societe Generale.

Investors are also watching the Gulf, where diplomatic efforts to prevent a renewed escalation in conflict after the US elections have helped push oil prices lower and weighed on the dollar in recent days.

However, a senior Iranian official told Reuters on Tuesday that Iran and the US were far from reaching a deal to end the war.

FRANC, YUAN AND AUSSIE

Elsewhere, traders reacted to a series of domestic developments.

The Swiss franc strengthened after annual inflation accelerated to its highest level in nearly three years in October, driven by a sharp rise in petrol prices.

The dollar fell 0.3% to 0.8164 francs, while the euro slipped 0.2% to 0.9137 francs, its lowest level against the Swiss currency since June.

China's yuan weakened sharply after the central bank raised the amount of foreign currency that financial institutions must hold as reserves, a move seen by traders and analysts as an attempt to slow the currency's recent gains.

The dollar rose 0.37% against both the onshore and offshore yuan to 6.672.

The Australian dollar fell 0.5% to $0.6963 after the Reserve Bank of Australia raised its cash rate by 25 basis points to 4.85%, as expected, but a split vote raised doubts about further increases.

The central bank has raised rates by a total of 125 basis points this year. A narrower-than-expected 6-3 vote suggested policymakers may be nearing the end of the tightening cycle.

"The split vote has trimmed market RBA hike pricing, contributing to the move lower in (the Australian dollar)," said Westpac analysts.

"The latest statement has also removed the line that the RBA is 'willing to increase the cash rate further if necessary' which suggests a more measured approach to hikes moving forward."

Other central banks due to announce policy decisions this week include those of Britain, Norway and Sweden.

(Reporting by Alun John in London, Jiaxing Li in Hong Kong and Ankur Banerjee in Singapore. Editing by Clarence Fernandez and Mark Potter)