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Dollar edges up, but on track for weekly loss

[August 19, 2016] By Patrick Graham

LONDON (Reuters) - The dollar inched higher on Friday but was set for a more than 1 percent loss against all its major peers on the week, weighed down by investors' lack of belief in the chances of a rise in U.S. interest rates this year.

All of the major currencies were trading in tight ranges, with the exception of the Australian dollar, pushed 0.8 percent lower by a cut by Moody's in its outlook for Australian bank ratings.

The week has been dominated by a run of mixed signals from Federal Reserve policymakers. Minutes from the U.S. central bank's latest meeting on Wednesday showed they are split over whether to press ahead quickly with rate rises.

Comments in favour of a hike soon from San Francisco Federal Reserve Bank President John Williams and his New York counterpart William Dudley offered the dollar some support.

But market pricing on balance suggests investors are growing no more convinced of the case for raising rates, with the chances of a quarter point rise in December around 40 percent.

That has soothed any worries for the moment of another blow to the developing economies who have borrowed heavily in dollars over the past five years, giving investors the freedom to push funds into emerging markets and commodity-linked currencies.

But it has also been a straight "sell dollars" play, with the yen, the euro and sterling all higher on the week.

"The dollar has just been trading on the back foot really," said Lee Hardman, a strategist with Bank of Tokyo-Mitsubishi in London. "The market is generally of the view that the Fed isn't going to raise rates any time soon. That leaves the dollar vulnerable in the near term."

GROWING CHORUS

The dollar index, which tracks the greenback against a basket of six major rivals, was down 1.4 percent for the week, though it rose 0.2 percent on Friday to 94.397 <.DXY>. It had fallen as low as 94.077 on Thursday, its weakest since June 23.

The euro dipped 0.3 percent to $1.1325, up 1 percent on the week, while the yen traded at 100.15, half a yen off an eight-week high of 99.55 yen hit on Tuesday.

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An employee of a bank counts US dollar notes at a branch in Hanoi, Vietnam May 16, 2016. REUTERS/Kham

Williams joined the growing chorus signalling support for a U.S. interest rate hike in coming months, saying waiting too long could be costly for the economy. But he also said he was in no hurry and that followed a paper earlier in the week in which he argued rates in general would prove be lower than previously expected.

"Some Japanese investors, commercial orders, are still interested in buying dollars on any move to 99 yen, so some short-term guys are not testing the downside today," said Kaneo Ogino, director at foreign exchange research firm Global-info Co in Tokyo.

Japan's Vice Finance Minister for International Affairs Masatsugu Asakawa repeated on Thursday that Japanese financial authorities were watching for speculative currency market moves and would respond if needed.

But Asakawa also said it was easy for markets to become volatile given low liquidity during the summer holidays and the conviction among analysts that 100 yen was a level that Tokyo would respond to with intervention has evaporated.

"Dollar-yen is playing with that 100 level," said Jane Foley, a strategist with Rabobank in London. "We blame the soggy dollar as a trigger but there is a lot of yen strength here.

"In February we had a big recovery in risk appetite and yet the yen did not relinquish its gains. I think a lot of this is about the Bank of Japan being near the end of the road on policy options."

(Additional reporting by Lisa Twaronite; Editing by Janet Lawrence)

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