Market News

By Jaspreet Kalra

MUMBAI (Reuters) -The U.S. dollar hovered near a two-week high against a basket of other major currencies on Friday as investors scaled back rate cut bets ahead of Federal Reserve Chair Jerome Powell's speech at the Jackson Hole symposium.

The euro and sterling touched their weakest levels versus the dollar since early August and were last steady at $1.1160 and $1.3413, respectively.

The dollar index edged up 0.1% to 98.72, on course for a 0.9% rise on the week to snap a two-week losing streak.

While indications of U.S. labour market weakness had bolstered hopes of an reduction in borrowing costs next month, expectations have been tempered by economic data flashing inflationary risks and cautious comments from Fed policymakers.

Traders are currently pricing in just under a 70% chance of a 25 basis point rate cut in September, down from 75% on Thursday, CME's FedWatch tool showed.

"The dollar has been reflecting the risk that (Powell) could stick to his guns and become more cautious," said Jane Foley, head of FX strategy at Rabobank.

Fed officials on Thursday appeared lukewarm to the idea of a rate cut next month, setting the stage for Powell's speech at 10 a.m. EDT (1400 GMT) at the annual Jackson Hole conference in Wyoming.

Chicago Fed president Austan Goolsbee acknowledged the upcoming meeting is "live" and could bring a change in interest rate policy, although he noted mixed economic data and unexpectedly high inflation data gave him pause about the prospect of an imminent easing.

The 2-year U.S. Treasury yield, sensitive to interest rate expectations, nudged up to 3.80%, adding to a 5-basis-point rise in the previous session. Bond prices move inversely to yields.

Data showed Germany's economy shrank by 0.3% in the second quarter from the first as demand from the U.S. faded following months of accelerated buying in anticipation of U.S. tariffs.

"While financial markets seem to have grown numb to tariff announcements, let’s not forget that their adverse effects on economies will gradually unfold over time," Carsten Brzeski, global head of macro at ING Research, said in a note.

U.S. tariffs and a stronger euro exchange rate against multiple currencies make it hard to see how the German economy would recover from a "seemingly never-ending stagnation" in the second half of the year, the note said.

The single currency is up 12% so far this year versus the dollar, benefiting from a decline in the U.S. currency.

Analysts at BofA Global Research said that although they saw modest near-term upside potential for the dollar going into Powell's speech, they continued to hold an overall bearish outlook amid rising stagflation risks for the U.S. economy.

The yen weakened 0.16% against the dollar but Japanese 30-year government bond yields hit new highs and 10-year yields touched a 17-year high after core inflation data kept expectations of a Bank of Japan interest rate hike in the coming months alive.

The Swedish crown and Norwegian crown were down about 0.2% each in the face of a firmer dollar.

(Reporting by Jaspreet Kalra; editing by Mark Heinrich, Kirsten Donovan)