FOREX-Dollar on defensive as September Fed cut bets ramp up

By Kevin Buckland

TOKYO, Aug 28 (Reuters) - The dollar started Thursday on the back foot as traders added to bets for a Federal Reserve interest rate reduction next month after New York Fed chief John Williams signaled a cut was possible.

The U.S. currency has also come under renewed pressure from President Donald Trump's ramped-up campaign to exert more influence over monetary policy decisions, as he attempts to fire Fed Governor Lisa Cook and replace her with a loyalist.

The dollar weakened against the euro even as France's prime minister unexpectedly called a confidence vote for next month, which is likely to result in the fall of his minority government.

The dollar index =USD, which gauges the currency against six major peers, was steady at 98.135, following two days of declines.

The euro EUR=EBS added 0.07% to $1.1646, and sterling GBP=D3 edged up 0.03% to $1.3504.

The dollar slipped 0.11% to 0.8017 Swiss franc CHF=EBS, although it ticked up 0.05% to 147.47 yen.

Kyodo News reported Japan's chief trade negotiator Ryosei Akazawa had canceled a trip to Washington, which ostensibly was aimed at ironing out details of Japanese investment in the United States as part of its tariff deal.

The government said the reason was that administrative matters still needed to be confirmed, according to the report. Akazawa was due to have boarded a flight on Thursday.

On the U.S. monetary front, the Fed's Williams said in an interview with CNBC on Wednesday that "every meeting is, from my perspective, live."

"Risks are more in balance," he said. "We are going to just have to see how the data play out."

Key among data releases ahead of the Fed's September 16-17 policy meeting is the PCE price index on Friday - the Fed's preferred inflation measure - and the monthly payrolls report a week later.

Traders currently lay around 84% odds of a quarter-point rate cut next month, and have priced in a cumulative 56 basis points of easing by year-end.

That helped send two-year Treasury yields US2YT=RR, which are extremely sensitive to policy expectations, sliding to the lowest since May 1 overnight, adding to pressure on the dollar.

President Trump's push to add hand-picked dovish-leaning candidates into the central bank's decision-making committee also pulled short-term yields lower, even though his attack on Governor Cook could spark a protracted legal battle after she sued to keep her job.

The dollar edged 0.04% lower to 7.1491 yuan in offshore trading CNH=D3.

The Australian dollar AUD=D3 gained 0.09% to $0.6512.