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Dollar falls as traders weigh next U.S. rate hike

By Richard Leong

By Richard Leong

NEW YORK (Reuters) - The dollar weakened against a basket of major currencies on Thursday, posting its steepest one-day drop in over two weeks, due to lower U.S. bond yields and uncertainty over the timing of the Federal Reserve's next interest rate increase.

The greenback posted losses for a second day, retreating further from a one-month high set during a winning streak where it touched a five-week peak versus the euro and a 2-1/2 week high against the Japanese yen.

Traders have scaled back bets on a looming U.S. rate hike as they concluded Fed Chair Janet Yellen did not deliver enough conviction at her economic testimony before Congress on Wednesday on whether the Fed's next rate increase would come at its March 14-15 meeting.

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However, she signaled more than two rate increases may be possible this year as the economy approaches full employment and inflation closes in on the Fed's 2 percent goal.

"The dollar rally that preceded Yellen's testimony wasn't given more fuel so we are seeing that move fade," said Richard Scalone, co-head of foreign exchange at TJM Brokerage in Chicago.

Investors now await for details from U.S. President Donald Trump on possible proposals on tax cuts, looser regulations and infrastructure spending, traders said.

"With the spotlight on Trump’s policy agenda, the Fed has taken a backseat as their response has become more sensitive to the president’s fiscal initiatives," said Peter Ng, senior currency trader at Silicon Valley Bank in Santa Clara, California.

The dollar index <.DXY> was last down 0.7 percent at 100.49, below a one-month peak of 101.76 reached on Wednesday.

The greenback scaled back from a 2-1/2 week high of 114.95 yen <JPY=> on Wednesday against the yen, touching a low of 113.17 yen. It was last down 0.9 percent at 113.15 yen.

The euro gained 0.7 percent at $1.0669, recovering from a five-week trough of $1.052 <EUR=> set on Wednesday.

Earlier Thursday, the greenback briefly pared its losses against the euro and yen following encouraging data led by a Philadelphia Fed measure on U.S. Mid-Atlantic business activity which hit a 33-year high in February.

Reduced expectations about a rate increase in March, together with declines on U.S. equity indexes, helped revive investors' appetite for U.S. Treasuries, pushing benchmark yields below 2.50 percent <US10YT=RR>.

Interest rates futures implied traders saw an 18 percent chance of a rate increase in March <FFH7>, down from 31 percent on Wednesday, according to CME Group's FedWatch program.

(Additional reporting by Yumna Mohamed; Editing by Lisa Shumaker and Richard Chang)