(Adds Citi comments on Yellen)
* Dollar recovers from slide on NAFTA, debt ceiling worries
* Euro dips back below $1.18
* Fed watched for signs on balance sheet reduction
* Graphic: World FX rates in 2017 tmsnrt.rs/2egbfVh
By Patrick Graham
LONDON, Aug 24 (Reuters) - The dollar recovered some ground on Thursday after another politically-driven slide against the euro and yen, helped by uncertainty over what message Federal Reserve policymakers will send over coming days.
The dollar has dropped 14 percent against the euro this year, driven by a collapse in expectations for tax cuts and other pro-growth moves by the Trump administration that has weakened the case for further rises in U.S. interest rates.
But the U.S. central bank remains the only of the world’s big monetary authorities to have begun raising rates and it is also seeking to rationalise the huge stores of securities it has built while pumping cash into the economy in the past eight years.
Any harder signal on that issue from Fed chair Janet Yellen when she speaks on Friday at the meeting of central bankers at Jackson Hole would be liable to help the greenback. The U.S. currency gained around 0.2 percent in Europe to trade at $1.1788 per euro.
“The market is short dollars already and from a risk-reward point of view, it makes sense to close some of those positions, just in case Yellen said something hawkish,” said Jane Foley, a strategist with Rabobank in London.
“The ECB might be more concerned about the strength of the euro and hence we are near $1.20 and not $1.25. But I don’t get the feeling that this uptrend (for the euro) is over yet.”
The dollar rose around a quarter of a percent to 109.28 yen and 0.2 percent against the basket of currencies used to measure its broader strength.
That was still just a minimal recovery from losses since President Donald Trump on Tuesday suggested that a shutdown of the government was possible and threatened to terminate the North American Free Trade Agreement.
His remarks, made ahead of a debate in Congress over a spending package and a rise in the debt ceiling, also prompted Fitch Ratings to warn about the impact on the government’s credit rating.
Congress will have about 12 working days, when it returns on Sept. 5 from its summer break, to approve spending measures to keep the government from shutting. Also, a deadline is nearing for raising the cap on how much the federal government may borrow.
Traders from Citi told clients in a morning briefing that they leaned towards expecting a bullish message for the dollar from Yellen.
“Our base case is for Yellen to be mildly hawkish,” they said. “If (the Fed is) going to hike again this year, it will have to be due to loosening financial conditions and stability risks. If she concentrates on laying the groundwork for that, we think the market will take this as USD-positive.”
For Reuters Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets
Additional reporting by Masayuki Kitano; Editing by Keith Weir and John Stonestreet