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Dollar peels off two-week lows ahead of central bank deluge

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By Amanda Cooper

LONDON (Reuters) – The dollar bounced off two-week lows on Friday, shrugging off some of the weakness that has set in this month as expectations have grown that the Federal Reserve may not raise interest rates again for some time.

Next week is packed with key monetary policy meetings, including those of the Federal Reserve, the European Central Bank and the Bank of Japan.

Meanwhile, data on Thursday that showed a rise in the

number of Americans filing new claims for unemployment benefits surged to the highest in over 1-1/2 years last week pushed the dollar index down 0.8% – its largest one-day fall since the depths of the regional banking crisis in March.

The index, which measures the U.S. currency against six others, is down 0.6% for the week, set for its biggest weekly fall also since mid-March when fears about the health of the banking sector roiled markets. It was last up 0.2% on the day.

“This jump put jobless claims close to a two-year high and has been read by markets as a clear sign of coming weakness in the U.S. economy and a more-hesitant-to-hike Fed,” CaxtonFX strategist David Stritch said.

“The question now becomes, is this data isolated and the market simply read too much into it, or is it the first red flag that the U.S. economy may be weaker than first expected?”

Money markets show traders are placing just a one-in-four chance of a 25-bp rate hike next week by the Fed, which would bring U.S. rates to 5.50%.

“Before the meetings that we had this week I would have said I was expecting the status quo, now I’m not excluding something surprising, because a central bank like Canada, that had clearly telegraphed it was on hold, raised rates and said it was concerned about inflation,” said Chester Ntonifor, FX strategist at investment provider BCA.

The Bank of Canada and the Reserve Bank of Australia both jolted markets earlier this week by raising interest rates to tackle stubborn inflation, which has raised expectations for other central banks to stay tough on price pressures.

The ECB meets on Thursday and is widely expected to raise eurozone rates by 25 bps to 3.50%, given core inflation is still rising, even though headline inflation has softened.

“For me, it’s clear that the ECB is going to stay hawkish, I don’t think they’re going to be more hawkish than what’s already priced in by markets, what is interesting is the Fed,” Ntonifor said.

The euro eased 0.2% to $1.0762, backing off Thursday’s two-week high. Sterling, which jumped nearly 1% on Thursday, was flat at $1.2546, near one-month highs.

The dollar rebounded against the Japanese yen, rising 0.46% to 139.55 after BOJ Governor Kazuo Ueda reiterated the central bank’s resolve to keep monetary policy ultra-loose.

The Turkish lira tumbled more than 1% against the dollar to a record low after President Tayyip Erdogan appointed Hafize Gaye Erkan, a finance executive in the United States, to head Turkey’s central bank.

(Additional reporting by Rae Wee and Ankur Banerjee in Singapore and Alun John in London; Editing by Sam Holmes, Kim Coghill and Sharon Singleton)

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