FOREX-Dollar stalls as dovish Fed tone dials down rate expectations

(Updates prices, adds analyst comment)

By Harry Robertson and Tom Westbrook

LONDON/SINGAPORE, Oct 10 (Reuters) – The dollar was steady on Tuesday and below recent highs as comments by Federal Reserve officials dampened rate hike expectations, although investors kept an eye on the conflict between Israel and the Palestinian Islamist group Hamas.

Currency markets were relatively muted as traders waited for more Fed officials to speak later in the day, as well as minutes from the last Fed meeting to be released on Wednesday and U.S. inflation data on Thursday.

The euro was last up 0.1% against the dollar at $1.0577. It has risen after hitting its lowest level since December last week at $1.0448.

“They’re not big moves, so you can’t really say the dollar is stronger and weaker,” said Chris Turner, head of markets at European lender ING.

“For the last few weeks U.S. bond yields have dominated markets and they’re having a bit of a breather.”

The yen was last lower, with the dollar up 0.33% at 149.01 yen. Japan’s currency bounced after the Kyodo news agency reported that the Bank of Japan is considering raising its forecast for core consumer inflation this year, but then gave up its gains.

The dollar index, which tracks the greenback against six peers, was last up less than 0.1% at 106.05. It remained below last week’s 11-month high of 107.34 and traded at roughly the same position as a week earlier.

U.S. bond yields dropped sharply on Tuesday when trading reopened following the Columbus Day holiday. The fall in global borrowing costs helped boost Asian and European stocks.

Analysts said the drop in yields was driven by comments from two Fed officials on Monday saying that rises in long-term yields might negate the need for further hikes, and by traders seeking out safe-haven assets after Palestinian militant group Hamas’ assault on Israel.

Futures-implied pricing for the chance of another Fed rate hike this year fell from above 40% last week to about 30% on Tuesday.

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The yield on the 10-year U.S. Treasury, which moves inversely to the price, was last down 11 basis points at 4.674%. It hit its highest since 2007 last week at 4.887%.

Israel’s shekel was pinned at 3.95 to the dollar, just off an almost eight-year low hit on Monday, after the central bank pledged $30 billion to stem the sell-off in the currency.

“They’re firmly engaged here and I think they want to stop it from trading at that 4 level,” said ING’s Turner.

Israeli officials said on Tuesday that Israel had re-established control over the Gaza border after another night of relentless air strikes on the enclave.

The Swiss franc, a traditional safe-haven currency, was last up against the dollar, with the greenback down 0.2% at 0.9047 francs.

Fed officials Raphael Bostic, Christopher Waller, Neel Kashkari and Mary Daly are due to speak later on Tuesday.

“The idea that the increases in bond yields have done part of the tightening job appears to be gaining traction among some Fed officials,” said OCBC rates strategist Frances Cheung.

“We remain of the view that the (Fed) is done hiking rates, but inflation is still the swing factor and (the) market likely stays volatile in the short term.”

(Reporting by Tom Westbrook; Editing by Sam Holmes, Simon Cameron-Moore and Susan Fenton)