* Dollar index at 6-month low, gives up all post-Trump gains
* Dollar/yen posts biggest daily decline since July on Wed
* Yen shows muted response to Japan GDP data
By Hideyuki Sano
TOKYO, May 18 (Reuters) - The dollar wallowed near six-month lows against a basket of major currencies on Thursday as the U.S. political crisis appeared to deepen, and likely to delay any efforts by President Donald Trump to carry out his economic stimulus plans.
The Justice Department appointed a former FBI director as special counsel to investigate possible collusion between President Donald Trump’s 2016 campaign team and Russia.
The appointment of a special counsel follows Trump’s dismissal of James Comey, his FBI director who was investigating Russia’s role in the U.S. election.
Media then reported that Trump may have interfered with a federal investigation, a serious allegation that could even lead to his impeachment if verified.
“Political instability in the United States is shaking markets. You would put a brake on investments to the U.S. when you see those headlines,” said Bart Wakabayashi, Tokyo Branch Manager of State Street Bank.
The dollar index reached its lowest level since early November, having shed 2.2 percent in the past four sessions.
It last stood at 97.42, having given up all the gains it had made following the U.S. election in November.
Although Trump’s surprise election victory had initially sparked buying in the dollar and U.S. assets on hopes for his tax cuts and infrastructure spending plans, such “Trump trades” has been wound back.
Indeed, the index has fallen 5.8 percent from its 14-year high marked 103.82 set on Jan 3, despite widespread talk that the U.S. currency should be supported by the prospect of higher U.S. interest rates.
The Federal Reserve raised rates in March and its officials have said there could be two or three more rate hikes this year.
Yet, U.S. political turmoil and softer-than-expected U.S. economic data in the past week, such as retail sales, consumer inflation and housing starts, is leading market players to discount the chance of more rate hikes.
Fed Fund futures are now pricing in only about 60 percent chance of a rate hike by June, compared to around 90 percent earlier this month, and are no longer pricing in a 100 percent of one hike even by December.
Against that backdrop, the dollar dropped 2.09 percent against the yen on Wednesday, its biggest fall since July 29 last year.
It fell to a three-week low of 110.53 yen on Thursday before bouncing back a tad to 111.09 yen, up 0.3 percent from late U.S. levels, on Japanese bargain-hunting.
The yen showed limited response to data that showed Japan’s GDP grew an annualised 2.2 percent in the first three months of this year, beating economists’ forecast of 1.7 percent rise.
“Although the headline GDP was stronger than expected, the GDP deflator was deeper into negative, pointing to persistent deflationary pressure,” said Minori Uchida, chief currency analyst at the Bank of Tokyo-Mitsubishi UFJ.
The euro hit a six-month high of $1.1174 and last stood at $1.1161.
The Swiss franc hit a six-month high of 0.9774 to the dollar on Wednesday before easing back to 0.9789.
Against the euro, to which the Swiss currency is closely tied, the franc firmed to 1.09270 franc per euro from last week’s eight-month low of 1.0987. (Reportijg by Hideyuki Sano; Editing by Eric Meijer)