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Dollar climbs vs euro, yen on prospect of less dovish Fed

Kitco News

NEW YORK (Reuters) - The dollar rose to a three-week high against the euro and a one-week peak versus the yen on Friday ahead of a speech from Federal Reserve Chair Jerome Powell, with investors expecting him to express some reluctance to embark on a long rate-cut cycle after a chorus of Fed officials voiced a similar sentiment.

Powell will address the Jackson Hole symposium of central bankers at 1400 GMT on Friday, and traders are waiting to see how closely he allies himself with the hawks within the Fed.

Currency markets have in recent months been driven by a shift at global central banks to looser monetary policy as economic demand slows and trade disputes intensify.

Expectations that the Fed will cut rates at its next meeting in September have been fully priced into interest rate futures, but the currency market is likely to react if Powell’s comments do not match the dovish expectations. Money markets price in at least two rate cuts of 25 basis points this year.

“We think it is far more likely that Powell remains non-committal and disappoints those looking for shock and awe policy next month,” said Mazen Issa, senior FX strategist, at TD Securities.

In early morning trading, the euro was down 0.2% at $1.1061, after touching a three-week low of $1.1052, as the dollar gained and 10-year U.S. Treasury yields rose to a one-week high of 1.663%. An index that tracks the dollar against six major currencies was up 0.2% at 98.325.

The dollar was also up 0.1% versus the yen at 106.52, after hitting a one-week high of 106.73.

Fed officials kept preaching patience when it comes to easing. Cleveland Federal Reserve President Loretta Mester, who did not support the rate cut last month, told CNBC that if the economy continues to perform the way it has, the U.S. central bank “should keep things the way they are.”

Dallas Fed President Robert Kaplan said he does not see July’s easing as part of a rate-cutting cycle.

On Thursday, Kansas City Fed President Esther George and Philadelphia Fed President Patrick Harker said the Fed currently does not need to further stimulate the economy.

China’s offshore yuan stabilized at 7.0920 after dropping to an 11-day low of 7.1072 overnight as the People’s Bank of China lowered its official yuan midpoint to an 11-year low. The move was limited even though the set rate was nowhere near the lows traders expected.

Reporting by Gertrude Chavez-Dreyfuss; Additional reporting by Olga Kotaga in London; Editing by David Gregorio

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