FOREX-Dollar steady after Friday rally as investors weigh a Warsh-led Fed, commodity-linked currencies soft

By Samuel Indyk and Rae Wee

LONDON, Feb 2 (Reuters) - The dollar clung on to gains on Monday as investors weighed what a Federal Reserve under Kevin Warsh might look like, while plunging precious metals and oil prices weighed on commodity-linked currencies.

The slide in commodities spilled over into equity markets in Asia and Europe, marking a nervous start to the week filled with central bank meetings and top-tier economic data, as well as an election in Japan.

The yen JPY= was back on traders' radars, after Japanese Prime Minister Sanae Takaichi over the weekend talked up the benefits of a weaker yen in a campaign speech, in a tone at odds with her finance ministry which has worked to stem the currency's declines.

The dollar was flat in Europe after a rally on Friday sparked by U.S. President Donald Trump's pick of Warsh as the next Fed chair. Analysts assume Warsh will be less likely to press for all-out rapid rate cuts than some other candidates who had been in the running, though he has sounded more dovish than current chair Jerome Powell.

Against a basket of currencies, the dollar =USD was last at 97.21, little changed after Friday's 1% gain.

"Kevin Warsh is, on the surface, the most dollar-bullish option that Trump could have picked," said Mohamad Al-Saraf, FX and fixed income associate at Danske Bank.

"I wouldn't say the political risk premium in the dollar is gone but at least some of the near-term risk has been alleviated."

Market pricing remains for two Fed cuts for this year, with a move seen as unlikely until June, when Warsh would be chair if confirmed by the Senate. 0#USDIRPR

The euro EUR= was comfortably away from the $1.20 level as it last stood at $1.1852, while sterling GBP= was little changed at $1.3690. Both the European Central Bank and the Bank of England are expected to keep policy rates on hold when they announce their latest decisions on Thursday.

COMMODITY CURRENCIES SOFT

Currencies from economies with greater exposure to commodity prices and risk sentiment were soft on Monday.

The Australian dollar AUD= fell as much as 0.7% to $0.6908, ahead of the Reserve Bank of Australia's rate decision on Tuesday, even with expectations it will deliver a hike. It was last down 0.3% at $0.6944.

The kiwi dollar NZD= fell as low as $0.5991, while the Canadian dollar CAD= dropped 0.2%.

Against the Norwegian krone NOK=, the dollar rose as much as 0.7% as Brent LCOc1 and U.S. crude futures CLc1 both fell about 5% on signs of a de-escalation in U.S.-Iran tensions.

YEN WEAKENS

The Japanese yen JPY= was a touch weaker at 154.90 per dollar on Monday, pressured in part by Takaichi's weekend comments that seemed to condone a weaker currency and expectations that her party is likely to score a landslide victory in the upcoming lower house election.

A survey by the Asahi newspaper showed the Liberal Democratic Party (LDP) is likely to well exceed a majority of 233 seats out of 465 seats up for grabs in the lower house.

Analysts at Societe Generale said that while the forecast sounds "excessively" favourable, such a win would mean "a lot" for Takaichi if achieved.

"This will enable Takaichi to freely pursue her expansionary policy," they said, adding that the initial market reaction would be to price in a greater risk premium on longer-dated Japanese government bonds and the yen.

Investors have sold the yen and Japanese government bonds in the run-up to the election, on expectations of more expansionary fiscal policy should Takaichi win a strong mandate and that the tax cuts her party has touted would further strain already stretched government finances.

Still, the ailing yen has found a floor in recent times, as traders remain on alert to the prospect of a coordinated currency intervention by the U.S. and Japan after talks of rate checks from both sides late last month sent the currency surging.