July 19, 2019 / 7:49 AM / a month ago

FOREX-Dollar steadies after rise in bets on bigger Fed rate cut

* Williams’ comments undermine dollar briefly, support euro

* Currency markets waiting for central bank meetings

* Emerging market currency index hits 4-month high

* Graphic: World FX rates in 2019 tmsnrt.rs/2egbfVh

By Tommy Wilkes

LONDON, July 19 (Reuters) - The U.S. dollar recovered slightly in early Friday trading, having fallen heavily after dovish comments from a key policymaker bolstered expectations of an aggressive interest rate cut this month.

At a central banking conference on Thursday, New York Fed President John Williams argued for pre-emptive measures to avoid having to deal with too-low inflation and interest rates.

That sent the dollar down before it rebounded slightly after a New York Fed representative subsequently said Williams’ comments were academic and not about immediate policy direction.

Investors took Williams’ remarks along with separate comments from Fed Vice Chair Richard Clarida as another dovish signal from the central bank, which could be opening the way for a big rate cut at the end of this month.

Investors are now pricing in a 25 basis point rate cut later this month, and some even expect a 50 basis point move, although the dollar has held up reasonably well.

“Fed rate cut expectations have only resulted in modest U.S. dollar weakness so far which has been more evident recently against higher yielding currencies given the renewed search for yield,” MUFG analysts wrote.

The euro weakened 0.2% to $1.1261 but remained firmly within its weekly range as traders wait for next week’s European Central Bank meeting.

The dollar index , which hit a two-week low of 96.648, bounced to 96.855.

The dollar did particularly well against the yen, rising 0.3% to 107.60.

Sterling was on the back foot again, falling 0.3% to $1.2515 and undoing some of its recovery on Thursday when British lawmakers had voted for a plan to make it harder for a new prime minister to push through a no-deal Brexit.

The dollar’s weakness and expectations of a dovish shift in the rate cycle have boosted many emerging market currencies.

MSCI’s emerging market currency index has risen 0.35% so far this week to a four-month high of 1,657.07, coming within sight of this year’s double peak around 1,658, hit in late January and March.

“If the Fed cut rates, that could encourage fresh investments in emerging currencies and other risk assets,” said Bart Wakabayashi, State Street Bank’s representative in Japan.

The New Zealand dollar, which has rallied more than 1% to a 3-1/2 month high this week as investors expect Fed rate cuts to boost the attractiveness of the higher-yielding kiwi, eased slightly to $0.6776.

The currency has the second-highest bond yield among G10 currencies after the U.S. dollar. (Additional reporting by Hideyuki Sano in Tokyo; Editing by Kevin Liffey)

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