January 26, 2018 / 4:33 AM / a year ago

FOREX-Dollar gains reprieve after Trump backs 'strong dollar'

* Dollar trades above recent lows vs major peers

* Euro edges up, but well below its 3-year high

* Sterling firmer, but down from post-Brexit vote peak (Updates prices, adds comments)

By Masayuki Kitano

SINGAPORE, Jan 26 (Reuters) - The dollar traded above its recent lows against major rivals on Friday, having bounced after U.S. President Donald Trump said he wanted a “strong dollar”, contradicting earlier comments made by Treasury Secretary Steven Mnuchin.

Trump told CNBC in an interview in Davos, Switzerland, on Thursday that he ultimately wants the dollar to be strong, adding that Mnuchin’s comments had been misinterpreted.

The dollar’s bounce pulled the euro away from three-year highs and knocked sterling off its strongest levels since June 2016. The dollar stayed steady against the yen, holding above a four-month low struck on Thursday.

Against a basket of six major currencies, the dollar last traded at 89.176 , staying above a three-year low of roughly around 88.43 set this week. The dollar index has slid more than 3 percent so far in January.

Some market participants doubted whether Trump’s comments would be enough to change the recent trend of dollar weakness.

“The market forces, fundamentals all suggest that the dollar should weaken over the course of 2018,” said Roy Teo, investment strategist for LGT Bank in Singapore.

Trump is due to address the World Economic Forum in Davos later on Friday.

Market participants say the dollar has faced headwinds because its relative yield attraction is seen at risk as the world’s major central banks are seen winding up their stimulus.

That would change the interest rate dynamics of the past few years, when the U.S. Federal Reserve was the only central bank raising rates.

The dollar has also been hampered by concerns over U.S. protectionism.

“My view is that the Trump trade policies, which I think are still going to be maintained, favour a weaker dollar,” said Stephen Innes, head of trading in Asia-Pacific for Oanda in Singapore.

Trump decided to impose steep import tariffs earlier in the week on washing machines and solar panels, flaming worries about trade protectionism that sent the greenback on the defensive.

The euro last traded at $1.2424, up 0.2 percent on the day but down from Thursday’s high of $1.2538.

The euro had reached that peak after European Central Bank President Mario Draghi said economic data pointed to “solid and broad” growth with inflation likely to rise in the medium term.

Draghi also warned that the surge in the euro was a source of uncertainty and said the ECB might have to review strategy if U.S. comments on the benefits of a weak dollar lead to a change in monetary conditions.

Sterling rose 0.4 percent to $1.4191, but remained well below its peak on Thursday of $1.4346, which was the pound’s highest level since the Brexit vote in June 2016.

Against the yen, the dollar held steady at 109.42 yen , staying above a four-month low of 108.50 yen struck on Thursday.

Asked about the comments on the dollar by Trump and Mnuchin, Japanese Finance Minister Taro Aso said on Friday that major economies have agreed to avoid targeting currencies for the purpose of trade competitiveness. (Reporting by Masayuki Kitano; Editing by Simon Cameron-Moore)

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