FOREX-US dollar set for worst week since July as Fed rate cut looms

By Karen Brettell

NEW YORK, Nov 28 (Reuters) - The U.S. dollar was heading for its worst weekly performance since late July on Friday as traders increased bets that the Federal Reserve will cut rates again next month.

The dollar has dropped this week as traders conclude that weakening labor data will lead to more rate cuts, even as many Fed policymakers express concern about still-elevated inflation.

"It feels like with the post-shutdown run of releases, it's generally been soft ... the data overall definitely leaned towards a cut," said Eric Theoret, FX strategist at Scotiabank in Toronto.

The U.S. federal government is releasing a backlog of economic data after reopening from a record 43-day shutdown.

Fed funds futures traders are pricing in 87% odds of a cut at the conclusion of the Fed's December 9-10 meeting, up from 71% a week ago, according to the CME Group's FedWatch Tool.

Fed officials will enter a blackout period on Saturday ahead of the meeting.

The dollar index =USD, which measures the greenback's strength against a basket of six major peers, was last down 0.09% at 99.44, and on track for a 0.61% weekly loss, its largest since July 21.

ANTICIPATION AHEAD OF BOJ MEETING

Bank of Japan Governor Kazuo Ueda is due to speak on Monday, and traders will focus on whether he signals a likely rate increase at the BOJ's December meeting, which could continue to lift the currency.

“There's obviously a lot of anticipation around the Bank of Japan meeting in December. Will they hike rates? Will they not hike rates? And up until now, Ueda has been reasonably non-committal/dovish and hasn't really signaled a December hike yet," said James Lord, head of FX and emerging market strategy at Morgan Stanley.

"But with dollar-yen at these levels and the fiscal package that has been announced by the government, there's a possibility that we will see a rate hike in the December meeting," Lord said.

Japanese Prime Minister Sanae Takaichi's government on Friday finalised a $117 billion supplementary budget for this financial year to fund a massive stimulus package, most of which will be financed through new debt issuance.

The Japanese yen JPY= strengthened 0.14% against the greenback to 156.09 per dollar.

FOREX TRADING CALM AFTER CME OUTAGE

An overnight 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. By 1335 GMT, trading had resumed after having been knocked out for over 11 hours, according to LSEG data.

Currency markets appeared largely unfazed by the outage during U.S. hours, which came in already light trading volumes after Thursday's U.S. Thanksgiving Day holiday.

"Liquidity remains thin given that most participants executed month-end trades ahead of yesterday’s Thanksgiving holiday, and most major pairs are seeing choppy, but range-bound trading action with technical levels holding firm," said Karl Schamotta, chief market strategist at Corpay in Toronto.

The euro EUR= rose 0.06% to $1.1602.

Sterling was little changed at $1.3237 GBP=D3 and heading for its best weekly performance since early August with a gain of 1.09%, after British Finance Minister Rachel Reeves revealed her long-awaited budget this week.

"Obviously (the budget) was garnering a lot of headlines, but it also felt like a lot of the bad news had been priced in. And overall, it feels like the market had a bit of a relief rally in the pound on Wednesday," said Theoret.

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.

The Canadian dollar extended gains after data showed that Canada's economy grew at a much faster pace than expected in the third quarter as crude oil exports and government spending boosted economic activity. The loonie CAD= was last up 0.39% versus the greenback at C$1.398 per dollar.

In cryptocurrencies, bitcoin BTC= fell 0.38% to $91,052.