FOREX-Dollar rebounds from slump spurred by Powell's dovish surprise

By Laura Matthews

NEW YORK, Aug 25 (Reuters) - The dollar advanced against major currencies on Monday, bouncing from a steep fall last week that followed remarks from Federal Reserve Chair Jerome Powell that boosted expectations for a rate cut next month.

The dollar index =USD, which measures the greenback against a basket of currencies, rose 0.49% to 98.32, and was on track for its biggest daily percentage gain since July 30, with the euro EUR= down 0.69% at $1.1634, after hitting a four-week high of $1.174225 on Friday.

Major brokerages, including Barclays, BNP Paribas and Deutsche Bank, expect a 25-basis-point Fed rate cut in September following Powell's remarks on Friday when he said risks to the U.S. jobs market were rising, although he also said inflation remained a threat.

"While Powell and company are undoubtedly still leaning toward cutting interest rates next month, the combination of this week’s Core PCE report, next week’s NFP release, and August’s CPI data could still sway the central bank toward holding off if they unanimously point to higher inflation and a weakening jobs outlook," said Matt Weller, global head of market research at StoneX.

"In other words, forex traders are realizing that a September rate cut isn’t quite a done deal yet, and traders are hedging their bets against the potential for a split decision to hold rates unchanged for another month, leading to a modest but broad-based recovery in the U.S. dollar."

Traders were pricing in an 84.3% chance for a cut of at least a quarter-point at the Federal Reserve's September meeting, down slightly from the 84.7% in the prior session, according to CME's FedWatch tool but well above the 61.9% expectation a month ago.

Measured against a basket of six major currencies =USD, the dollar has weakened by more than 9% this year. The euro has been the lead gainer in the basket with a climb of more than 12%.

Samy Chaar, chief economist at Lombard Odier, expects the euro to strengthen to about $1.20-$1.22 over the next six-to-12 months.

Meanwhile, euro zone bond yields moved higher on Monday, reversing a fall from late last week as traders reassessed their expectations for the Fed and the impact on Europe. They also processed data showing an uptick in German business morale.

Germany's 10-year bond yield, the benchmark for the euro zone, rose 3.9 basis points to 2.758%, DE10YT=RR nearing a five-month peak of 2.787% hit last week.

U.S. Treasury yields were also slightly higher across the curve as traders calibrated positioning. The two-year Treasury yield US2YT=RR, especially sensitive to interest rate expectations, was last up 4 basis points at 3.728%.

Apart from the Fed's policy path, investors are likely to stay focused on U.S. President Donald Trump's attacks on Powell and other Fed policymakers, which have raised concerns about the central bank's independence.

White House economic adviser Kevin Hassett told CNBC in an interview that the Trump administration's move to replace Powell as head of the central bank will likely take months as the president decides on a replacement.

"Renewed efforts to reshape the Fed present a potential challenge to longer maturities," analysts at Goldman Sachs said in a note. The 30-year U.S. Treasury yield US30YT=RR inched up 0.1 basis point and was last at 4.8836%.

Upcoming data points which could influence the central bank's policy path include the Fed's preferred inflation gauge, the PCE price index, on Friday, and monthly payrolls figures for August, due a week later.