FOREX-US dollar rises, but on track for weekly drop ahead of Fed, BOJ

By Gertrude Chavez-Dreyfuss

NEW YORK, July 25 (Reuters) - The U.S. dollar advanced on Friday, bolstered by solid economic data that suggested the Federal Reserve could take its time in resuming interest rate cuts, while tariff negotiations showed more clarity that eased some uncertainty in the market.

The U.S. currency showed little reaction to data showing new orders for key U.S.-manufactured capital goods unexpectedly fell in June while shipments of those products increased moderately. That suggested business spending on equipment slowed considerably in the second quarter.

"The dollar regained some ground the past two days, after being on the defensive earlier in the week ... supported mostly by an encouraging set of U.S. economic data that argues for continued patience at the Fed," said Elias Haddad, senior markets strategist at Brown Brothers Harriman in London.

The greenback was set for its biggest weekly drop in a month, ahead of more tariff dialogue and central bank meetings next week, while sterling dipped after softer-than-expected British retail sales data.

Both the Fed and the Bank of Japan are expected to hold rates steady at next week's policy meetings, but traders are focusing on the subsequent comments to gauge the timing of the next moves.

"We see some room for optimism at the (Fed) meeting," wrote BNP Paribas in a research note. "Economic uncertainty associated with trade policy, while not entirely resolved, has declined markedly."

Politics is a factor for both central banks, most dramatically in the U.S., where President Donald Trump once again pressed for lower interest rates on Thursday as he locked horns with Fed Chair Jerome Powell.

Brown Brothers' Haddad said the Fed's monetary policy is being "overshadowed by the political pressure to lower interest rates. That's one of the reasons why I think the dollar's upside is limited."

The dollar managed to recover a touch against the euro late on Thursday, however, after Trump said he did not intend to fire Powell, as he has frequently suggested he could.

"The market relief was based on the fact that Trump refrained from calling for Powell to go, although that was based on Trump's view that Powell would 'do the right thing'," said Derek Halpenny, head of EMEA research at MUFG.

He added, however, that "the theme of Fed independence being undermined by the White House will unlikely go away and remains a downside risk for the dollar."

BOJ MEETING

Falls against the euro and yen leave the dollar index =USD, which measures the dollar against six other currencies, at 97.45, on track for a drop of 0.8% this week, its weakest performance in a month, though it bounced back 0.2% to 97.663 on Friday.

Meanwhile, in Japan, though the trade deal signed with the U.S. this week could make it easier for the BOJ to continue rate hikes, the bruising loss for Prime Minister Shigeru Ishiba's coalition in upper house elections on Sunday complicates life for the BOJ.

The yen was softer, thanks in part to below-expectations Tokyo inflation data, with the dollar last up 0.4% at 147.59 yen, though on course for a weekly 0.9% fall JPY=EBS, the lowest since June 23.

The euro was flat at $1.1741 EUR=EBS, but set for a weekly gain of nearly 1%, its best showing in a month.

The common currency took some support Thursday from the European Central Bank meeting. Policymakers left the policy rate at 2%, as expected, but the bank's relatively upbeat assessment of the economic outlook and signs that an EU-U.S. trade deal is near caused investors to reassess previous assumptions of one more rate cut this year. GVD/EUR

In contrast, soft British data is supporting expectations of more Bank of England rate cuts, and causing euro zone bond yields to rise faster than British ones, supporting the euro against the pound. GB/

The euro rose to 87.43 pence versus sterling on Friday, its highest since April, building on a 0.44% gain the previous day. EURGBP=D3. It was last up 0.4% at 87.42 pence.

Data on Friday showed British retail sales data for June came in slightly below analysts' expectations, albeit rebounding from a sharp drop in May. Figures on Thursday showed business activity grew only weakly in July and employers cut jobs at the fastest pace in five months.

Against the dollar, the pound fell 0.6% to $1.3434 GBP=D3.