Dollar perks up as Fed divided over rates outlook

SINGAPORE, Feb 19 (Reuters) - The dollar was off recent lows on Thursday and hanging on to a bounce after minutes from the Federal Reserve showed policymakers did not seem to be in a rush to cut interest rates and that several were open to hikes if inflation proved sticky.

Investors were also nervous about a reported build up of U.S. forces in the Middle East and a potential U.S.-Iran conflict, which lifted oil prices and safe haven assets.

U.S. yields were higher and the dollar's Wednesday gains against the euro and yen were consolidated, holding the single currency just below $1.18. [US/]

The Aussie dollar held at $0.7050 after employment data showed the jobless rate stayed at multi-month lows of 4.1%.

The New Zealand dollar was smarting, having notched its steepest percentage drop since last April's tariff blitz, after the central bank took a cautious line about future interest rate hikes, undershooting market expectations.

The kiwi had dropped nearly 1.4% on Wednesday and was just under $0.60 in Asia trade. The euro hovered at $1.1790, having also taken a knock on a report European Central Bank President Christine Lagarde plans to leave before her term ends in October next year. Sterling sat at $1.3482. [GBP/]

The Fed minutes showed policymakers divided over where to take U.S. rates and suggested that the next chairman, due to start in May, will have a hard time pushing through rate cuts.

Several policymakers are expecting productivity gains to dampen inflation, the minutes said, but "most participants" cautioned progress may be slow and uneven. Several even indicated hikes are possible if inflation stays above target.

"This suggests there isn't a great deal of urgency to cut rates again, at least not until after current chair (Jerome) Powell's term ends in May," said Peter Dragicevich, Asia-Pacific currency strategist at Corpay.

Data on Wednesday showed U.S. factory production increased by the most in 11 months in January and rises in capex and housing starts. Markets are looking ahead to global purchasing managers' index figures and U.S. gross domestic product data, due on Friday.

YEN DROPS AS US INVESTMENT SPEND BEGINS

The yen took a knock on the stronger dollar overnight, and as the Trump administration announced projects valued at $36 billion as the first investments under Japan's promised $550 billion U.S. investment pledge.

It was down 1% overnight and slipped further to 155.25 to the dollar on Thursday, a retreat from the 152 level that it had tested last week in the wake of Prime Minister Sanae Takaichi's landslide electoral victory.

The yen has been sliding for years on a combination of low local interest rates and concern about Japan's budget outlook, but has lately found support on hopes for economic growth.

"Direct Japanese investment into the U.S. will be a key watch factor this year, and one which adds to the very mixed picture on USD/JPY," said Chris Turner, global head of research at ING.

"The question for FX markets this year is whether this investment proves a supportive dollar flow or something like Japan's FX reserves are used to guarantee new USD loans and avoid pressure on the yen. The latter seems to be the preferred outcome for Tokyo."

Holidays for Hong Kong, China and Taiwan lightened Asia trade and the yuan was steady at 6.90 to the dollar in offshore trade.

(Reporting by Tom Westbrook; Editing by Lincoln Feast and Shri Navaratnam.)