Unlike previous episodes of trade tensions when the dollar benefited from an increase in trade tensions between the world's two biggest economies, U.S. President Donald Trump's latest threat to raise tariffs on Chinese imports have prompted market strategists to focus on the corrosive impact on Washington.
"U.S. policymakers have made it clear that the next step for the central bank will be based on incoming economic data and markets are expecting a rate cut will materialise sooner than later if trade tensions escalate further," said Ricardo Evangelista, a senior analyst at ActivTrades in London.
Against a basket of its rivals, the dollar dipped 0.02 percent to 97.61. Market expectations for a rate hike stand at about 80 percent before the end of the year.
Data earlier showed China's trade surplus with the United States, a major irritant for Washington, expanded to $21.01 billion in April from a month ago, a factor that might provoke a hardening stance from U.S. officials.
Focus is on trade talks on Thursday and Friday in Washington, where Chinese Vice Premier Liu will try to salvage a deal that would avoid a sharp increase in tariffs on Chinese goods scheduled to take effect on Friday.
The Chinese yuan in the offshore market edged 0.1 percent lower to 6.8037 and within striking distance of a four-month low hit on Monday.
"The threat of further escalation in the tariff war becomes real again and at the moment, it is just impossible to assign any probability to any scenario, positive or negative," Societe Generale strategists said in a note.
The prospects of an escalation rather than a resolution of the spat between the U.S. and China has seen the yen gain in recent days, with the currency up 0.2 percent against the dollar at 110.07 yen, taking its gains to more than 1 percent so far this month.
The New Zealand dollar was a notable loser overnight after the central bank cut benchmark cash rates to 1.5 percent from 1.75 percent.
The kiwi was last off 0.1 percent, recovering somewhat after falling to $0.6525 in the immediate aftermath of the rate cut, its lowest since last November.
Elsewhere, the euro was flat at $1.1191, but holding within recent ranges as currency traders were still undecided on the inflationary outlook for the euro zone economy and the latest developments on the trade war front.
"The European Central Bank is likely to keep a close eye on the renewed escalation of the trade war as the real economic consequences could be considerable, affecting its monetary policy," Commerzbank strategists said.
The pound fell for a third day, edging down half a percent to $1.3006 on signs that talks between Britain's government and the main opposition Labour Party to break the Brexit deadlock may soon collapse.