* Dollar index slides on lower U.S. bond yields
* Dollar falls against euro and yen; China's yuan drops most in three years
By Sam Forgione
NEW YORK, Feb 25 (Reuters) - The dollar fell against a basket of major currencies on Tuesday after soft U.S. consumer confidence data drove bond yields lower, but stayed strong against the yuan after China's currency posted its biggest drop in three years.
The Conference Board's index of consumer attitudes fell to 78.1 in February from a downwardly revised 79.4 in January, where economists in a Reuters poll had expected 80.0.
The yield on the benchmark U.S. 10-year Treasury note fell to a session low of 2.7 percent, indicating higher bids for the safe-haven bond in response to the weak data, pressuring the dollar.
The dollar index, a measure of the dollar against a basket of major currencies, last traded down 0.08 percent at 80.14.
"We've seen U.S. fixed-income market buying and that's perceived as slightly dollar-negative," said David Bradley, a trader at Scotia Capital in Toronto.
The dollar held gains against the yuan, however, which posted its biggest drop in three years and fell below its official midpoint rate on moves by China to stamp out easy betting on the currency. The dollar was last up 0.03 percent against the yuan to trade at 6.1266.
Spot yuan has entered a dramatic weakening cycle in recent weeks, guided downward by a series of weak fixings by the People's Bank of China (PBOC), with additional momentum added to the slide by the unwinding of yuan positions by Chinese banks.
The yuan's decline "is being completely engineered by the Chinese central bank," said Richard Franulovich, senior currency strategist at Westpac Banking Corporation in New York. "The authorities are effectively forcing everyone out of that trade."
The dollar was down slightly against the euro, which last traded up 0.04 percent at $1.3741. The dollar was also down 0.36 percent against the Japanese yen to trade at 102.13.
The dollar index has risen a modest 0.1 percent this year after weak U.S. economic data on hiring, retail sales, and housing have driven bond yields lower and weakened demand for the U.S. currency.
Some investors have discounted the weak data on the belief that they were a direct result of freezing temperatures and snow storms across much of the nation this year.
The euro gained after the closely watched German Ifo survey beat expectations on Monday. The gains against the dollar came despite new European Commission forecasts which predicted 1 percent inflation this year and 1.3 percent in 2015, well short of the European Central Bank's target of just below 2 percent.
In a week lacking major economic data, all eyes will be on Friday's first estimate of euro zone February inflation. Recent months' numbers have seen price growth sliding below 1 percent, strengthening the case for more action by the European Central Bank to promote growth.
The Australian dollar, meanwhile, was down after the yuan's decline. The Aussie is the nearest developed world currency to a proxy for growth in China, which takes much of Australia's commodities output.
The Australian dollar was last down 0.24 percent at US$0.9014, although it was still some distance above January's three-and-a-half-year low of $0.8660.
"Weaker iron ore, weaker Chinese stocks and a weaker yuan are not a constructive backdrop for currencies like the Aussie," said Westpac's Franulovich. He said weak iron ore prices hurt the Australian dollar since iron ore is the country's biggest export to China.
- UK International News