* Economic re-start hopes help riskier currencies higher
* Sino-U.S. tensions cap gains; rally lags equity spurt
* Graphic: World FX rates in 2020 https://tmsnrt.rs/2RBWI5E
By Tom Westbrook
SINGAPORE, May 26 (Reuters) - The dollar inched lower on Tuesday as growing optimism about a global recovery from the COVID-19 pandemic supported riskier currencies, but moves lacked the exuberance of the equities market as Sino-U.S. tensions kept the mood in check.
The trade-sensitive Australian and New Zealand dollars each rose about half a percent, but remain below last week's highs. The Chinese yuan, a barometer of U.S.-China relations, was also mostly left behind by a rally in other Asian currencies.
"Markets are caught between two conflicting currents," said Michael McCarthy, CMC Markets' chief strategist. "Rising tensions between China and the U.S. are raising concerns, while easing COVID-19 lockdown measures are fuelling growth optimism."
Against a basket of currencies =USD the dollar was marginally softer at 99.618. It inched higher on the Japanese yen JPY= to 107.80 and was a tad weaker elsewhere.
The Australian dollar AUD=D3 rose 0.5% to $0.6571 and the kiwi NZD=D3 by about the same margin to $0.6129. AUD/
The yuan CNY= pared early gains to hold at 7.1326 in onshore trade, not far above a seven-month low of 7.1435 hit on Friday. CNY/
Trade, the handling of the pandemic and China's move to impose laws on Hong Kong are all seen as potential catalysts for a further deterioration in already testy U.S.-China relations.
The latest salvos came over the weekend, with White House National Security Adviser Robert O'Brien warning of potential sanctions if Hong Kong's autonomy was undermined, and China's top diplomat Wang Yi criticising U.S. attacks as a "smear". elections looming, U.S. politicians are compelled to ratchet up the tension in the coming months," Singapore's DBS Bank economists said in a note on Tuesday.
"A ruinous cold war that hurts global trade, supply chains, efficiency of common standards and geopolitical stability is increasingly on the cards, in our view."
Meanwhile, the economic fallout from the pandemic, and the global policy response, keeps growing and investors are becoming increasingly nervous that a pullback may be due.
China's central bank Governor Yi Gang flagged further easing in an interview published by the People's Bank of China on Tuesday. third downgrade in Singapore's growth forecast also provided a fresh reminder of the pandemic's devastating impact on the global economy. outlook prompted Australia's ANZ and Singapore's OCBC Bank both to talk down the prospect of much further upside in the Antipodean currencies.
"At current levels a global recovery is in the price, and we believe it's a question of when, not if, depreciation resumes," ANZ analysts said in a note, while OCBC's strategist Terence Wu similarly expects the greenback to gain back some ground.
Still, from Europe to Japan, restrictions on businesses and movement are lifting and there is plenty of hope for a swift return to growth. The British pound GBP=D3 rose 0.3% to $1.2218 and the euro EUR= tacked on 0.2% to $1.0918.
And the relative calm has the braver traders looking for carry -- and with reason: the beaten-down Mexican peso and Brazilian real each added between 4% and 5% on both sterling and the common currency last week. GBPMXN=R EURMXN=R
"We've got the perfect ground right now for Mexican peso or Brazilian real outperformance," said Chris Weston, head of research at Melbourne brokerage Pepperstone. "It's basically choose your carry vehicle, or funding currency, and get paid." (Editing by Jacqueline Wong)