FOREX-US dollar rises on positioning moves, but outlook remains bearish

By Samuel Indyk and Gertrude Chavez-Dreyfuss

NEW YORK/LONDON, Sept 12 (Reuters) - The U.S. dollar rose on Friday, a day after falling on a surge in U.S. jobless claims and modest inflation, as investors expected the Federal Reserve to cut interest rates next week after a roughly nine-month hiatus.

The greenback rose 0.3% to 147.66 yen JPY=EBS, on track for its largest percentage gain in 10 days, after rising for three straight weeks.

The dollar firmed earlier on Friday after a U.S.-Japanese joint statement affirmed exchange rates should be "market determined" and that excess volatility and disorderly moves in exchange rates were undesirable.

The dollar index =USD was up 0.1% at 97.69, but stayed on track to post a weekly fall of under 0.1% and its second consecutive weekly decline.

John Velis, Americas macro strategist at BNY in New York, said Friday's rally was more about position-squaring ahead of the weekend.

"The broader picture is still quite negative for the dollar on a variety of measures," Velis said. "One, of course, is the Fed now beginning to cut rates. The other is, we still see hedging behavior taking place, so foreign investors buying U.S. assets and selling the dollar to hedge it, which is going to keep pressure on the dollar lower."

Data showing U.S. consumer sentiment falling for a second straight month in September weighed slightly on the greenback.

The University of Michigan said on Friday its Consumer Sentiment Index fell to 55.4 this month, the lowest since May, from a final reading of 58.2 in August. Economists polled by Reuters had been expecting a reading of 58.0, little changed from the month before.

On Thursday, data showed the biggest weekly increase in four years in the number of Americans filing new applications for jobless benefits.

That overshadowed U.S. consumer inflation data for August, which showed prices rising at the fastest pace in seven months but with increases still modest and broadly in line with expectations.

While the mixed data might add some wrinkles to the Fed's policy deliberations next week, investors are mostly focused on rate cut prospects.

"The hurdle to faster cuts is labor market weakness as long as inflation stays well behaved," said Dominic Bunning, head of G10 FX strategy at Nomura.

"I still think it's a very high bar to cut by 50 basis points next week."

Pricing of Fed fund futures indicates that the market believes the Fed is certain to cut its key interest rate by 25 basis points (bps) on September 17.

However, traders have reined in bets on a larger 50 bps rate cut next month, with pricing implying a shallower path of easing before the end of the year than anticipated earlier, according to the CME Group's FedWatch tool.

The benchmark 10-year Treasury note yield US10YT=RR rose 5.1 bps to 4.062% from its U.S. close of 4.011% on Thursday, when it fell below 4% for the first time since April.

The euro was down less than 0.1% at $1.1724 EUR=EBS, a day after rising, as traders curbed their bets on another European Central Bank rate cut this cycle to bet on another move at less than 50%.

The ECB kept its key interest rate on hold at 2% for a second straight meeting on Thursday, with chief Christine Lagarde saying the bank remains in a "good place" and that risks to the economy had become more balanced than before.

Fitch Ratings, meanwhile, is expected to give its verdict on French public finances after Friday's markets close following the confidence motion on September 8.

"Fitch's sovereign rating model is, if anything, likely to indicate a small improvement," Citi analysts wrote in a research report.

"Going explicitly against the direction of its model and 'manually' downgrading the rating would require the agency to come to the conclusion that the balance of power between stakeholders of public funds has tilted further away from financial creditors since the last rating decision in spring," they wrote.

Among other currencies, sterling was little changed at $1.3565 GBP=D3, after data showed the British economy stagnated in July.

The offshore yuan was last at 7.1239 yuan per dollar CNH=, weakening 0.2%, while the Australian dollar was a touch softer at US$0.6685 AUD=D3, although it remained near a 10-month high.