By Samuel Indyk and Ankur Banerjee

U.S. dollar banknote and stock graph are seen in this illustration. REUTERS

(Reuters) - The U.S. dollar firmed on Tuesday as talks between Beijing and Washington continued for a second day, stirring investors' hopes of an easing in trade tensions, while sterling dropped as British jobs data pointed to a weaker labour market.

Officials from the world's two largest economies were meeting in London to try to defuse a dispute that has widened from tariffs to restrictions over rare earths.

"Unlike the Geneva talks (held in May), where tariff relief provided easy wins, the London talks are now tackling thornier issues like chip export controls, rare earths, and student visas," said Charu Chanana, chief investment strategist at Saxo.

U.S. President Donald Trump and his Chinese counterpart Xi Jinping spoke by phone last week at a crucial time for both economies that are showing signs of strain from Trump's cascade of tariff orders since January.

The dollar index , which measures the U.S. currency against six others, was 0.3% higher at 99.255, but remained close to a six-week low of 98.351 it touched last week.

The index is down 8.7% this year as investors, worried about the impact of tariffs and trade tensions on the U.S. economy and growth, flee U.S. assets and look for alternatives.

The euro was down 0.2% at $1.1395, while the Australian dollar , often seen as a proxy for risk sentiment, was 0.2% lower at $0.6502.

Sterling was weaker after UK jobs data implied further weakness in the labour market, which could influence how quickly the Bank of England cuts interest rates.

British wages rose by a slower-than-forecast 5.2% in the three months to April, pushing sterling down 0.6% against the dollar to $1.3468.

"It (the labour market data) was definitely on the weak side," said Kirstine Kundby-Nielsen, FX analyst at Danske Bank.

"This puts a question mark on the hawkish bias that we've seen from the Bank of England."

The BoE is due to meet next week and is expected to keep the interest rate unchanged. Money market traders are pricing in about 48 basis points of cuts by year end.

The Bank of Japan is also expected to maintain borrowing costs at current levels at next week's policy meeting. Its governor, Kazuo Ueda, suggested on Tuesday that the timing of the next interest rate hike could be pushed back.

"Once we have more conviction that underlying inflation will approach 2% or hover around that level, we will continue to raise interest rates to adjust the degree of monetary support," Ueda told parliament.

While risks to Japan's export-heavy economy from Trump's tariffs have pushed back market bets on the next rate-hike timing, investors are on the look-out for clues from Ueda on how soon rate increases could resume.

The yen was last little changed at 144.71 per dollar but has gained over 8% against the U.S. currency this year on safe-haven flows during the market tumult unleashed by Trump's tariff chaos.

Investor focus this week will be on the U.S. consumer price index report for May, due on Wednesday. The report could give insight into the tariff impact when investors are wary of any flare-ups in inflation ahead of the Fed's policy meeting next week.

The U.S. central bank is also expected to hold rates steady. Traders are pricing in nearly two 25-basis point cuts by the end of the year.