Dollar rebounds as traders assess rate hike prospects elsewhere

© Reuters. FILE PHOTO: An employee of the Korea Exchange Bank counts one hundred U.S. dollar notes during a photo opportunity at the bank's headquarters in Seoul April 28, 2010. REUTERS/Jo Yong-Hak

By Tommy Wilkes

LONDON (Reuters) - The dollar rebounded off a one-month low on Monday as traders looked ahead to tighter U.S. monetary policy even as they bet on the prospect of interest rate hikes happening earlier outside of the United States.

Currency markets were broadly quiet at the start of the week with traders awaiting U.S. growth data and central bank meetings in the euro zone, Japan and Canada.

The dollar index initially dropped to a one-month low during trading in Asia, extending softness after Federal Reserve Chair Jerome Powell said on Friday it was not yet time to begin raising interest rates.

The index had recovered by 1100 GMT and was last up 0.1% at 93.726, helped by U.S. Treasury yields holding close to their recent highs.

While Powell said it was not right to start hiking rates, he also warned about inflationary pressures and said it was time to cut back on its asset purchases.

Analysts said the dollar's rebound was also aided by the euro slipping 0.2% to $1.1625 ahead of the European Central Bank meeting on Thursday.

"There is no way that they (ECB policymakers) can’t acknowledge that inflation has run higher, but also they do not want to get dragged into a game of expectations given the ECB’s dovish proclivities," said Jeremy Thomson-Cook, chief economist at payments firm Equals Money.

"Alongside inflation and growth data due this week, we will be able to mark the European economy a lot better against its UK and U.S. counterparts, something we expect to continue to allow for additional euro weakness moving forward."

The dollar also chalked up gains versus the Japanese yen, rising 0.2% to 113.68 yen. The Bank of Japan meets later this week but like the ECB, it is not expected to shift from its dovish policy stance.

But the U.S. currency did not rebound against all its rivals, with gains for commodity-linked currencies such as the Australian, Canadian and New Zealand dollars, which are also benefiting from the rally in commodity prices.

"Support for the U.S. dollar from higher U.S. yields has been dampened so far this month both by the improvement in global investor risk sentiment, and by similar rise in yields outside of the U.S. on average in other G10 economies," said Lee Hardman, an analyst at MUFG.

Australian inflation data, due on Wednesday, is likely to set the tone for the next stage in a tussle between traders and a resolutely dovish central bank.

Soaring housing costs and rising food and fuel prices have tapering in the frame when Canada's central bank meets on Wednesday.

Thursday's U.S. gross domestic product figures -- if they show an expected slowdown -- could take some pressure from the Fed even while inflation runs relatively hot.

Elsewhere, China's yuan hit a five-month peak at 6.3782 per dollar while the Turkish lira fell to a new record low in the wake of a surprise rate cut last week.