FOREX-Dollar set for worst week since July as traders maintain bets on December rate cut

By Ozan Ergenay

LONDON, Nov 28 (Reuters) - The U.S. dollar was heading for its worst weekly performance since late July on Friday as investors increasingly count on further monetary easing in December by the Federal Reserve, while Thursday's U.S. holiday thinned liquidity.

An outage due to a cooling issue at CME Group's CyrusOne data centres halted trade on its widely-used currency platform and in stock and commodity futures, though trading began to resume at 1200 GMT.

"We are not expecting any significant impact on the market, maybe it is something to keep an eye on just in case, but we are going to have a fairly quiet end to the month and the week," said Lee Hardman, senior currency analyst Global Markets Division for EMEA at MUFG.

The dollar index =USD, which measures the greenback's strength against a basket of six major peers, was last trading up 0.2% at 99.744, recovering some ground. But five days of declines still leave it set for its biggest one-week loss since July 21.

U.S. Fed funds futures are pricing an implied 87% probability of a 25-basis-point cut at the Federal Reserve's next policy meeting on December 10, compared to a 39% chance a week earlier, the CME Group's FedWatch tool showed.

The probability priced in by futures had been rising since New York Fed president John Williams said last week that the U.S. central bank could still cut interest rates "in the near term" without putting its inflation goal at risk.

The remarks "give us more confidence that they will cut rates, as we have seen in the FX market since then, which has, at least temporarily, put a dampener on the dollar's uptrend," Hardman said.

In Asia, the Japanese yen fluctuated after a period of decline.

It was last flat at 156.2 yen to the dollar as labour market and inflation data firmed up the case for monetary tightening in Asia's second-biggest economy, against a backdrop of persistent weakness in the currency that has raised the prospect of intervention from the Ministry of Finance.

Consumer prices in Japan rose 2.8% year-on-year in November, slightly faster than economists had expected and above the Bank of Japan's 2% target.

"The yen has kind of stabilised at weaker levels this week, it has reduced pressure on Japan to step in and support the currency," Hardman said.

Hardman said the Japanese government's comments last week came as a signal that if the yen continues to weaken, then the BOJ would bring forward plans to resume rate hikes.

EURO AND STERLING SET FOR BEST WEEK IN OVER THREE MONTHS

Elsewhere, the euro was last down 0.3% at $1.1558 EUR= on the dollar, but still up around 0.5% for the week and set for its biggest weekly gain since July, amid talks on a U.S.-backed plan to end the Russia-Ukraine war.

"While there is considerable caution in markets about the prospects of a peace deal, any material progress from here should weigh on the dollar and support high-beta European currencies," said Francesco Pesole, FX strategist at ING.

Sterling fell 0.2% at $1.3206 GBP=D3 on the day, though it was heading for its best weekly performance since early August after British finance minister Rachel Reeves revealed her long-awaited budget earlier this week.

Reeves fought back on Thursday against criticism of the government's spending plans, which will fund extra welfare spending by raising the country's tax burden to a post-World War Two high.