TOKYO Reuters - The dollar was below a two-decade high in Asian trading on Friday, after two Federal Reserve policymakers said they favored a smaller rate rise than the 100 basis-points that investors were betting on.
The dollar index, which measures the currency versus six counterparts, was 0.07% higher to 108.65, after reaching the highest since September 2002 at 109.29 on Thursday.
After consumer price inflation raced at the fastest pace in four decades, traders had been pumped up with bets that the Fed would go for a super-sized tightening at their July 26 -- 27 meeting.
But those bets were reduced after Fed governor Christopher Waller and St. Louis Fed President James Bullard both said they favored another 75 basis-point hike for this month, despite inflation figures.
The Fed funds futures indicate a 31% chance of a 100 basis-point increase, down from around 70% before the comments.
The dollar index is on course for a third winning week even though it is up 1.58% from last Friday on both bets for an increasingly aggressive Fed and the worry about a resulting recession, which has fueled demand for the currency as a safe haven.
Sean Callow, a currency strategist at Westpac, said that the dollar's index is expected to reach 111 in the next few weeks, despite the fact that momentum remains with the U.S. dollar.
The FOMC will have to remain hawkish at the July meeting and beyond, solidifying U.S. dollar yield support. The dollar fell 0.09% on Friday to 138.81 but was up 2% for the week and touched 139.38 overnight for the first time since September 1998, as the U.S. Treasury yields widened the gap to their Japanese counterparts, and it fell 0.09% on Friday to 138.81 against the yen.
The Bank of Japan is steadfast in its commitment to easing policy to support the economy, and is widely seen keeping its policy at a meeting next week.
The euro was flat at $1.0019 after bounced back from below parity on Thursday for a second day.
After Italian Prime Minister Mario Draghi offered to resign, the single currency dropped as low as $0.9952, but was rejected by the country's president.
The euro zone is struggling with a worsening energy crisis as Russia shut down a gas pipeline for regular week-long maintenance, leaving markets jittery about whether it will come back online, with Russia saying it will depend on demand and sanctions.
The European Central Bank is likely to stick the quarter-point rate increase it has flagged for next week, but the outlook is not close to the Fed, supporting the dollar's strength versus the euro.
After slumping to a 28 month low of $1.1761 overnight, sterling moved 0.12% higher to $1.1840. It is down 1.57% since last Friday, going for its worst week since early May as political turmoil casts a shadow over the currency.
The Australian dollar dropped 0.1% to $0.6755, shrugging off data showing a slower than expected decline in economic growth in key trading partner China.
The Aussie fell to a two-year low of $0.66825 on Thursday and is headed for a 1.43% weekly loss.