* Dollar gains capped as investors rethink rate outlook
* No major data, focus on Fed's Yellen
* August Fed hike expectations scaled down further
(Recasts, updates prices; changes dateline, previous LONDON,
byline)
By Lucia Mutikani
NEW YORK, June 18 (Reuters) - The dollar recovered some
recent losses on Wednesday but gains were capped as investors
scaled back expectations that the Federal Reserve will raise
interest rates in August after conflicting U.S. economic data.
Traders have also pared bets that the European Central Bank
will tighten policy with a series of rate hikes, giving the
dollar some support following two straight days of losses
versus the euro.
Analysts said trading conditions were expected to become
more volatile, tracking frequent policy-maker nuances on the
interest rate outlook in the euro area and United States.
"There is a little bit of a dollar bid, but what we see is
the dollar continuing to trade sideways within well worn
ranges," said Michael Woolfolk, currency strategist at Bank of
New York Mellon in New York.
"Officials from both Europe and the U.S. have been trying
to downplay expectations of a series of rate hikes by the Fed
and the ECB before year-end."
The New York Board of Trade's dollar index, which tracks
the dollar's performance against a basket of six currencies,
rose as high as 73.774 <.DXY> in overnight trade. It was last
up 0.2 percent at 73.668 in New York morning trade.
The euro was down 0.2 percent at $1.5481 <EUR=> after
earlier slipping to $1.5462. The dollar rose 0.1 percent to
108.08 yen <JPY=>.
RATE HIKE CHANCES TRIMMED
With no major economic data due for release during the New
York trading session, traders will monitor comments by Janet
Yellen, the San Francisco Federal Reserve president, at 11:45
a.m. (1545 GMT) and the weekly national petroleum report.
U.S. short-term interest rate futures are pricing in a 50
percent chance of a 25 basis points Fed rate increase in
August, down from 90 percent earlier in the week.
The U.S. central bank is widely expected to keep its
benchmark fed funds rate target at 2 percent next week, having
slashed it by 3.25 basis points since mid-September.
"There is no one who believes we are at a neutral policy
stance now on behalf of the Fed. We have extraordinary
monetary accommodation which at some point needs to be
removed," said Woolfolk.
A tightening in monetary policy will help the dollar regain
some of its appeal to investors seeking higher returns.
Expectations of a series of rates hikes from the ECB have
also been scaled back in recent days, but a move to 4.25
percent in July is still widely expected.
"What we're really having to contend with at the moment is
how central bank rhetoric and economic data is challenging
market expectations for monetary tightening by the end of the
year in the U.S. and euro area," said Kamal Sharma, G10
strategist at JP Morgan in London.
"Over the near term, we think euro/dollar is likely to be a
tug of war between competing central bank rhetoric."
Investors got more evidence of the U.S. economy's poor
health from FedEX Corp <FDX.N>, which reported a quarterly loss
and gave a dismal outlook for 2009.
Sterling remained on the back foot against the dollar,
dipping 0.1 percent to $1.9525 <GBP=> with little reaction to
minutes from the Bank of England's last policy meeting that
showed an 8-to-1 vote in favor of keeping British borrowing
costs on hold at 5 percent.
The market has been speculating on the possibility of a
rate hike from the British central bank to tame accelerating
consumer price inflation, which hit an annual 3.3 percent,
above the bank's 2.0 percent target and its highest since the
Labour government took power in 1997 [].
(Additional reporting by Veronica Brown in London; Editing by
Tom Hals)
