Dollar Steadies Near Two-Week High Before Fed, Euro Rises on ECB Rate Hike Bets

CURRENCY - TOKYO. The dollar hovered close to a two week high on Wednesday ahead of an expected U.S. Federal Reserve interest rate rise later in the day.

Traders also awaited policy decisions from the European Central Bank (ECB) and Bank of Japan (BoJ) this week.

The U.S. dollar index, which measures the currency against six major peers, edged 0.17% lower to 101.14, but was close to a two week high touched on Tuesday.

Money market traders see a quarter point hike from the Federal Reserve later on Wednesday as a near certainty, but are fairly equally split on the odds for another later in the year.

Continued signs of a resilient U.S. economy in the face of the Federal Open Market Committee's (FOMC) steep series of interest rate increases has helped lift the dollar index from a 15-month trough of 99.549 reached a week ago.

In the latest data, U.S. consumer confidence rose to a two-year high in July amid a persistently tight labour market and receding inflation.

"Given the deceleration in underlying inflation, we think the risk is (Fed Chair Jerome) Powell cools on another hike by describing the FOMC as 'data dependent,'" which would pressure the dollar, said Joseph Capurso, a strategist at Commonwealth Bank of Australia.

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FOCUS ON CENTRAL BANKS

Elsewhere, the ECB sets policy on Thursday. Again, a quarter point hike is widely expected, but building evidence of an economic slowdown has called into question the chances of another by year-end.

The euro rose 0.1% to $1.1070, after hitting a two-week low on Tuesday.

"If the ECB retain their hawkish bias, by no means guaranteed but more likely than the FOMC, euro is likely to track higher this week," Capurso added.

The BoJ sets policy on Friday, and speculation about a hawkish tweak to its yield curve control policy, which had soared earlier in the month, has receded over recent days.

The dollar was down 0.2% at 140.70 yen, following a rebound from a multi-week low of 137.245 mid-month.

The Australian dollar slid 0.4% to $0.6766 after slower-than-expected inflation data suggested the Reserve Bank of Australia (RBA) would forgo a rate hike on Aug. 1.

That unwound much of the Aussie's 0.79% gain of the previous day, after Beijing announced stimulus, lifting the economic outlook for Australia's key trading partner.

"Just when it looked safe to get back in the water with Aussie longs on the China sentiment rebound, the downside surprise on inflation casts fresh doubt on the extent of further RBA tightening needed," said Sean Callow, a strategist at Westpac, predicting the currency could drop below $0.67 near term.

Against the Chinese yuan, the U.S. dollar strengthened 0.15% to 7.1479 yuan in offshore trading, retracing part of the previous day's 0.67% decline.

Sterling flattened at $1.2908. The Bank of England sets rates on Aug. 3. Money markets are split between a 25 basis point (bp) or a 50 bp rate hike.