FOREX-Dollar falls on more downbeat Fed comments; focus on Japan talks, House vote

By Gertrude Chavez-Dreyfuss

NEW YORK, May 20 (Reuters) - The U.S. dollar weakened anew on Tuesday, weighed down in part by more cautious remarks about the economy by Federal Reserve officials, even as traders looked ahead to upcoming U.S. talks with Japan that could include discussions on currencies as part of a trade deal.

The greenback also was pressured by news President Donald Trump failed to convince Republican holdouts in the House of Representatives to back his sweeping tax bill. Trump met with Republicans on Tuesday to press his fellow party members to support the legislation.

The dollar had sold off broadly on Monday after Moody's downgraded the U.S. sovereign credit rating due to deficit concerns on Friday.

"The underlying bias is still to sell the dollar. I don't think that bias has changed," said Vassili Serebriakov, FX strategist, at UBS in New York.

Fed officials on Tuesday also doubled down on their concerns about the impact of the Trump administration's trade policies on the economy. St. Louis Federal Reserve Bank president Alberto Musalem said despite the recent U.S. and China trade tension easing, the labor market looks likely to weaken and prices to head higher.

Cleveland Fed President Beth Hammack told Axios that current trade developments could lead to stagflation, though other policies from the administration could offset that.

On Monday other Fed officials talked about the ramifications of the latest downgrade of the U.S. government's credit rating and unsettled market conditions as the Fed continued to navigate a very uncertain economic environment.

In afternoon trading, the dollar fell against the yen to a roughly two-week low of 144.095 yen. It was last down 0.2% at 144.495 yen JPY=, sliding in five of the last six sessions.

Tuesday's sell-off in long-dated Japanese government bonds, which pushed 30-year yields to record highs and those on the 20-year to a nearly 25-year peak, pressured the yen earlier, analysts said.

Also on traders' radar were upcoming U.S.-Japan talks, with Japanese Finance Minister Katsunobu Kato saying he expects any meeting with U.S. Treasury Secretary Scott Bessent on exchange rates to be based on their shared view that excessive currency volatility was undesirable.

Kato and Bessent are expected to meet on the sidelines of a G7 finance leaders' gathering to be held this week in Canada.

Comments from Japan's top trade envoy on Tuesday that Tokyo was firm in its anti-tariff stance pointed to no easy off-ramp in the negotiations in the weeks and months ahead.

RBA CUT, U.S. BUDGET PICTURE

Elsewhere, the Australian dollar dropped against the U.S. dollar after the Reserve Bank of Australia cut benchmark interest rates by 25 basis points and left the door open to further easing in the months ahead. The Aussie dollar was last down 0.6% at US$0.6416 AUD=D3.

The Chinese yuan weakened against the dollar as China cut key benchmark lending rates while corporate seasonal demand for dollars remained high.

Market attention is now focused on a key vote planned by the end of the week in the U.S. House of Representatives. Republican leaders in the chamber said they would press forward with the tax bill despite its uncertain prospects.

Trump's bill would add $3 trillion to $5 trillion to the country's debt, according to nonpartisan analysts. Ballooning fiscal debt, trade frictions, and weakened confidence have weighed on U.S. assets.

The U.S. dollar index has tumbled as much as 10.6% from its January highs, one of the sharpest retreats for a three-month period. It got a breather, however, after Trump paused many of the largest tariffs he announced last month.

And in the wake of Trump's tariff turmoil, Britain on Monday agreed to the most significant reset of defence and trade ties with the European Union since Brexit.

The pound was last up 0.2% at $1.3387 GBP=D3, having risen 0.6% on Monday.

The euro, meanwhile, rose 0.3% against the dollar to $1.1279 EUR=EBS, while the Swiss franc strengthened, pushing the dollar down 0.6% at 0.8295 franc.