May 6 (Reuters) - The dollar index fell for a third day on Tuesday as tariff uncertainty and geopolitical tensions sapped investor sentiment ahead of Wednesday's Fed policy decision. Treasury 10-year yields fell after solid auction results and earlier news that the U.S. trade deficit widened to a record high in March. U.S. Treasury Secretary Scott Bessent said the Trump administration could announce trade agreements as early as this week, that data does not show the U.S. is in a recession and that the borrowing capacity under the debt ceiling is "at the warning track." Prime Minister Mark Carney, after meeting with U.S. President Donald Trump, said some aspects of the USMCA trade deal will have to be changed and Canada would never be for sale. The trade pact is up for a review next year. Trump noted that "regardless of anything, we're going to be friends with Canada" though there is no reason to subsidize the country. Conservative leader Friedrich Merz was elected chancellor by the German parliament in a second round of voting after a shock defeat in his first attempt earlier in the day. EUR/USD firmed amid broad dollar weakness though the pair remains largely range bound above the April 10 high of 1.1241 awaiting a directional catalyst. Near-term resistance is at last week's high of 1.1425. EUR/CHF rose after Swiss National Bank Chairman Martin Schlegel said the bank was ready to intervene and cut interest rates even below zero to prevent inflation falling below its price stability target. GBP/USD gained 0.6% after finding buyers ahead of its 1.3231 21-day moving average. While a U.K.-India trade pact buoyed pound sentiment, focus remains on Thursday's Bank of England meeting. USD/JPY stayed defensive before Wednesday's Fed policy decision and Tokyo trading after a holiday. The pair is approaching nearby support at the April 29 low of 141.97.
Treasury yields fell 2 to 5 basis points as the curve steepened. The 2s-10s curve was up about 1 basis point to +50.6bp.
The S&P 500 fell 0.48%.
Oil surged over 3% on signs of more demand in Europe and China and rising tensions in the Middle East.
Gold rose 2.37% due to a weaker dollar and India-Pakistan tensions. Copper climbed 1.42%.
Heading toward the close: EUR/USD +0.50%, USD/JPY -0.89%, GBP/USD +0.65%, AUD/USD +0.46%, DXY -0.60%, EUR/JPY -0.40%, GBP/JPY -0.27%, AUD/JPY -0.45%.(Editing by Burton Frierson Reporting by Robert Fullem)
