* San Francisco Fed's Williams says Fed could end QE this
* Dollar index near July peak
* Dollar/yen near 4-1/2-year high, euro near 6-week low
By Anirban Nag
LONDON, May 17 The dollar rose against a basket
of currencies on Friday, trading near a 10-month high as debate
over whether the Federal Reserve would wind down its asset
buying programme later this year gathered pace.
The dollar's strength, along with expectations that the
European Central Bank could introduce negative deposit rates,
the rate at which banks park surplus funds with it, kept the
euro pinned down to recent six-week lows.
The dollar index, which measures its value against a
basket of six major currencies, rose 0.42 percent to 83.935,
nearing a 10-month high of 84.094 set on Wednesday. A break of
its July peak of 84.10 would see it rise to its highest in
nearly three years.
The dollar was up 0.15 percent at 102.35 yen, not far
from Wednesday's 4-1/2-year high of 102.77 yen with investors
taking Japanese Prime Minister Shinzo Abe's latest growth
strategy into their stride.
Investors added to favourable bets on the dollar, drawing
support from comments by a regional Federal Reserve chief who
said the Fed could begin easing up on stimulus this summer.
John Williams, the president of the San Francisco Fed, also
said the U.S. central bank could completely exit its easing by
the end of the year.
Although Williams is not a voter this year at the Federal
Open Market Committee, his views carry weight as they are often
considered close to those of top Fed officials such as Chairman
Ben Bernanke and Vice Chair Janet Yellen.
Bernanke and Yellen want to keep monetary policy ultra-loose
for a longer period of time, while others like Richmond Fed
chief Jeffrey Lacker say the economy's prospects are looking
better and the pace of asset purchases can be reduced.
"His comments took the market by surprise since he is a
dove," said Peter Kinsella, currency strategist at Commerzbank.
"It is a dollar story this year as the U.S. labour and
housing markets appear to be recovering. And while we do expect
the Fed to be cautious in withdrawing stimulus, the economic
recovery should drive the dollar higher."
A resurgent dollar pushed the euro down to $1.2863,
not far from a six-week low of $1.2843 hit on Wednesday.
The euro was also hurt by talk that the ECB was checking
banks' preparedness to handle a potential cut in its deposit
rates to below zero.
"The negative deposit rate talk is a threat that the ECB is
using to keep the euro lower," said Ian Gunner, portfolio
manager at Altana Hard Currency Fund. "I doubt with the
Bundesbank on board, the ECB will implement it."
Lowering the deposit rate to negative would make holding
euros unattractive and lead to a broad sell off, traders say.
ECB board members Joerg Asmussen and Benoit Couere said that
monetary policy will remain accommodative, bolstering a view the
central bank could use unconventional measures like introducing
negative deposit rates in coming months to support the