Crude oil futures edged lower in choppy trading on Tuesday, seesawing with Wall Street in a cautious market ahead of weekly oil inventory reports and with the U.S. July crude contract approaching expiration at the end of the session.

At 12:38 p.m. EDT (1638 GMT), expiring front-month U.S. July crude was down 16 cents at $77.66 a barrel, having recovered from an earlier $76.53 low.

U.S. crude for August, which will become the front month on Wednesday, was down 13 cents at $78.48 a barrel, having seesawed in tandem with the July contract.

In London, ICE Brent for August fell 7 cents to $78.75 a barrel.

The stability in the stock markets has been supportive for crude today. Prices were down earlier as people assessing what effects China's revaluation of the yuan would bring to oil prices say any impact would not be very significant and would be gradual, said Andy Lebow, a broker at MF Global in New York.

Also supportive for crude is the slightly improving demand we've been seeing in recent weeks in transport fuels, diesel in particular, added Lebow.

U.S. stock indexes were mixed after midday on Tuesday. Trading was choppy and shares were hemmed in by data showing sales of existing homes fell unexpectedly in May. .N

World equities fell on Tuesday and commodities paused amid expectations that a more flexible Chinese currency might not result in as much demand growth as initially anticipated.

The dollar rallied for a second straight day against the euro as new concerns about the funding needs of European banks offset stronger-than-expected German economic data. The yuan declined against the dollar.

The U.S. Federal Reserve's Federal Open Market Committee two-day meeting started on Tuesday and financial markets were waiting for indications that low interest rates would remain intact.

U.S. INVENTORIES

A Reuters poll of oil analysts on Monday yielded a forecast for U.S. crude stocks to have fallen 1.3 million barrels last week. Gasoline stockpiles were expected to be down 100,000 barrels and distillate inventories up 1.3 million barrels.

The industry group American Petroleum Institute was to issue its weekly inventory report at 4:30 p.m. EDT (2030 GMT) on Tuesday. The U.S. Energy Information Administration's report was due on Wednesday at 10:30 a.m. EDT (1430 GMT).

Front-month U.S. crude touched an intraday high near $79 a barrel on Monday, but pulled back as charts indicated technical resistance. Although prices have recovered about 20 percent from a trough below $65 on May 20, they are still about $9 lower than the 19-month high of $87.15 hit on May 3. (Graphic r.reuters.com/dyc53m)

U.S. crude's failure to breach strong resistance at $78.40 -- the 61.8 percent Fibonacci retracement on the move from $87.15 to $64.24 -- brings a new target of $76.50 into play, according to a Reuters market analyst.

Monday's crude rally came after China's central bank allowed the yuan to rise by nearly 0.5 percent against the dollar in the spot market, the daily limit, following a pledge at the weekend to make the currency more flexible.

That led to a commodities rally on Monday amid prospects for increased buying power from China.

A Reuters poll of analysts showed Chinese authorities were expected to allow only up to a 2.4 percent rise for the yuan against the dollar by the end of 2010, keeping its word that it will keep the currency basically stable.

China is the world's second-biggest oil consumer after the United States, accounting for about 10 percent of global use. But it is also the world's fifth-largest producer and in May it pumped more oil domestically than it bought from abroad. (Graphic r.reuters.com/bad53m)

(Additional reporting by Gene Ramos in New York, Christopher Johnson in London and Alejandro Barbados in Singapore; Editing by Walter Bagley)

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