Dollar weakens as September Fed cut bets grow

By Laura Matthews

NEW YORK (Reuters) -The dollar weakened against major currencies on Thursday, as traders added to bets that the Federal Reserve will cut interest rates next month after New York Fed chief John Williams signaled such a move was possible.

The U.S. currency has been under renewed pressure from President Donald Trump's ramped-up campaign to exert more influence over monetary policy, and as he attempted to fire Lisa Cook, one of the Fed's governors.

Cook filed a lawsuit on Thursday, claiming Trump has no power to remove her from office.

Although the dollar did trim some of its losses after Thursday's data showed improvement in jobless claims and gross domestic product expanding slightly more than expected, it was still treading water in U.S. afternoon session as traders await other critical pieces of data.

"It's not a picture of an economy that's about to weaken significantly," said Francesca Fornasari, head of currency solutions at Insight Investment. "Everything, ultimately, is going to hinge on what the Fed does, and non-farm payrolls. I suspect next week's number is going to be quite closely watched."

The currency fell against the euro even after France's prime minister on Monday unexpectedly called a confidence vote for next month, which looks likely to result in the fall of his minority government.

The euro was 0.43% higher at $1.1688. Sterling also rose 0.13% to $1.3516.

Williams said in a CNBC interview on Wednesday that it was likely rates can fall at some point but policymakers must see what upcoming data indicate about the economy to decide if a cut at the Fed's September 16-17 meeting is appropriate. 

Key among data releases before that meeting are the PCE price index on Friday - the Fed's preferred inflation measure - and the monthly payrolls report a week later.

Traders currently lay around 85% odds of a quarter-point rate cut next month, according to CME's FedWatch tool.

"We're all pretty keenly focused on where is the labor market at the moment, and how is that going to feed into the Fed at a moment when it seems like they're at a transition point back towards the easing cycle," said Brian Daingerfield, head of G10 FX strategy, NatWest Markets. "The details of the non-farm payroll report, to me, feel like that's going to be the moment at which tips the balance in one way or the other."

Trump's push to place hand-picked, dovish-leaning candidates on the central bank's decision-making committee also pulled short-term yields lower, even though his attack on Governor Cook could spark a protracted legal battle after she sued to keep her job.

The dollar index, which gauges the currency against six major peers, was last trading down 0.34% at 97.830, following two days of declines.

Against the yen, the dollar fell 0.40% to 146.815 yen.

Japan's chief trade negotiator Ryosei Akazawa canceled a trip to Washington at the last minute on Thursday, delaying an announcement of the details of Japan's $550 billion investment pledge in the United States as part of a tariff deal. 

A government spokesperson said the decision was taken after talks with the U.S. side revealed some points that need further discussion "at the administrative level".

The dollar slipped to its lowest level against China's offshore yuan since November, last down 0.46% to 7.1190 yuan in offshore trading.

(Reporting by Joice Alves and Laura Matthews; additional reporting by Kevin Buckland; Editing by Sharon Singleton, Hugh Lawson and Franklin Paul)