The dollar nursed losses on Friday after sustaining a large overnight drop as growing speculation that the U.S. central bank may be readying to signal a pause in its three-year rate hiking campaign was offset by concerns that global growth is slowing.
Expectations the U.S. Federal Reserve was readying to pause rates was bolstered after Fed Chairman Jerome Powell said last week that U.S. interest rates were nearing neutral levels, which markets interpreted as signalling a slowdown in rate hikes.
Those hopes received a fresh boost overnight after the Wall Street Journal reported Fed officials are considering whether to signal a wait-and-see attitude after a likely rate increase at their meeting in December.
"The dollar has come under renewed pressure as market hopes of peak U.S. interest rates have grown and the only reason the dollar is not much weaker from current levels is because global growth concerns have also grown," said Ulrich Leuchtmann, an FX strategist at Commerzbank in Frankfurt.
Expectations for next year have been marked lower and market watchers also expect any escalation in trade tensions to pose fresh headwinds. The Organisation for Economic Cooperation and Development estimates that global growth will slow to 3.5 percent in 2019 from 3.7 percent this year.
If the Fed raises interest rates as expected at its Dec. 18-19 meeting, it would be the fourth hike this year, and investors are waiting to see how much further the tightening cycle has to run.
Interest rate futures implied traders see less than one rate increase from the Fed in 2019, compared with previous expectations for possibly two rate hikes, according to money markets.
Another factor impeding the dollar's advance has been falling U.S. yields which has been chipping away at the yield differential advantage the greenback had this year.
The benchmark U.S. 10-year Treasury yield was last at 2.896 percent after dipping overnight to its lowest level since late August with the yield gap between ten-year maturities in U.S. and British government whittled down to 162 basis points from 174 basis points a month earlier.
"The guidance going forward will be key to yields and equity market moves, which right now foreign exchange markets seem to be reacting to," said Bart Wakabayashi, Tokyo branch manager at State Street Bank.
On Friday, the dollar was steady against the euro at $1.1371. Against the Japanese yen, it tacked on 0.1 percent to 112.79 yen.
The Australian dollar was flat at $0.7216, not far off a three-week trough of $0.7192 hit on Thursday.
(Reporting by Saikat Chatterjee; Additional reporting by Daniel Leussink in TOKYO Editing by Raissa Kasolowsky)
(With inputs from agencies.)