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FOREX-Dollar holds upper hand as market ponders Fed choice

Kitco News

* News of Taylor's candidacy at Fed helps to support dollar

* Yen helped by caution ahead of Japan election

By Hideyuki Sano

TOKYO, Oct 18 (Reuters) - The dollar held an upper hand against other major currencies on Wednesday as investors weigh the possibility that U.S. President Donald Trump will choose a more hawkish Federal Reserve chief with than the current chair, Janet Yellen.

The dollar index stood at 93.475, extending its rebound from Friday's 2 1/2-week low of 92.749. It rose as high as 93.729 on Tuesday.

With the Federal Reserve expected to raise interest rates for the third time this year in December, markets are now looking to who will lead the Federal Reserve after Yellen's term expires next February.

Trump has a pool of five candidates to choose from for the next chair of the Federal Reserve and is likely to announce his choice before going to Asia in early November, a source familiar with the situation said on Tuesday. "Who will be the next Fed Governor is the most important focus of the market now," said Yukio Ishizuki, senior strategist at Daiwa Securities.

"But whoever it will be, the Fed is going to continue policy normalisation and U.S. interest rates will be higher next year," he added.

The dollar got an extra boost this week after Stanford University economist John Taylor emerged as a major candidate.

Taylor is known as a proponent of a rule-based monetary policy and according to his formula, known as the Taylor rule, the Fed funds rate needs to be much higher than the current target of 1.0-1.25 percent.

Thus investors bet he could raise interest rates faster.

As the dollar gained broadly, the euro slipped to $1.1770 , little changed in early Asian Wednesday trade but down 0.5 percent so far on the week.

However, the dollar made less headway against the yen, as investors remain hesitant to take big positions ahead of Japan's election on Sunday.

Although Prime Minister Shinzo Abe's ruling party is expected to maintain a solid majority, the memory of recent election upsets in the United Kingdom and elsewhere has kept investors cautious.

The dollar fetched 112.22 yen , little changed on the day.

The British pound wallowed at $1.3193 having fallen 0.5 percent on Tuesday after comments by Bank of England policymakers were interpreted by markets as dovish.

The Bank of England's new deputy governor distanced himself from the central bank's majority view that interest rates probably need to rise soon, and another newcomer said her support for that position was "very contingent on the data". Prior to that, Data on Tuesday showed British inflation hit 3 percent in September, its fastest pace in more than five years and above the BoE's 2 percent target.

(Editing by Sam Holmes)

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