FOREX-Dollar firms with focus on Fed policy as French politics clouds euro

By Jaspreet Kalra

MUMBAI, Aug 27 (Reuters) - The dollar firmed against major currencies on Wednesday as investors turned their focus to upcoming U.S. economic data for policy cues, even as worries persist over the Federal Reserve's independence.

The euro EUR=EBS touched its weakest level since August 6 and was last down 0.4% at $1.1595. Sterling GBP=D3 declined 0.3% to $1.3442, and the Swiss franc CHF=EBS and the Japanese yen JPY=EBS both slipped by about 0.4% against the dollar.

Although the dollar appears to have shaken off the immediate worries over Fed independence that followed U.S. President Donald Trump's attempt on Monday to fire Governor Lisa Cook, the U.S. Treasury yield curve has steepened.

Cook's lawyer later said she would file a lawsuit to prevent her ouster, kicking off what could be a protracted legal fight.

Lee Hardman, senior currency analyst at MUFG, said the U.S. dollar's resilience could reflect that market participants are waiting for confirmation from the release of the August non-farm payrolls data and inflation reports that the Fed will "follow through with plans to resume rate cuts next month".

Since his return to the White House this year, Trump has relentlessly pressured the central bank to lower interest rates.

The two-year U.S. Treasury yield US2YT=RR, which typically reflects near-term rate expectations, bottomed at 3.6450% on Wednesday, its lowest since May 1, while the yield of its 30-year US30YT=RR counterpart was last up 5 basis points at 4.9562%.

Money markets are pricing in a 88% chance of a 25 basis point rate cut in September, according to the CME's FedWatch tool.

Elsewhere, political developments in France are the focus for the euro as Prime Minister Francois Bayrou battles to save his minority government ahead of a September 8 confidence vote over budget cuts.

A majority of French people want new parliamentary and presidential elections, opinion polls showed on Wednesday.

"There’s a clear danger that this mini crisis lasts longer, but even so, we expect the focus to switch back firmly to the U.S. economy next week," Kit Juckes, chief FX strategist at Societe Generale said in a note.

Investors will next week examine U.S. labour market and business survey data for clues on the future path of Fed policy.

"With Euro under a bit of a cloud, we would still rather go into next week-long JPY and AUD, though CHF appeals too," the note said.

French government bonds steadied on Wednesday, a day after the yield on the 10-year benchmark bond FR10YT=RR climbed to its highest level in five months.

Meanwhile, preliminary data released on Wednesday showed that British producer output price inflation rose to a two-year high of 1.9% in June, up from 1.3% in May, adding to signs of inflationary pressures in the economy.