February 1, 2018 / 12:52 PM / 9 months ago

FOREX-Dollar weakens after Fed bounce proves short-lived

* Dollar bounce after Fed meeting short-lived

* U.S. currency suffered worst month in 18 months in Jan

* Resilient euro back above $1.24 mark

* Graphic: World FX rates in 2018 tmsnrt.rs/2egbfVh

By Tommy Wilkes

LONDON, Feb 1 (Reuters) - The dollar erased early gains on Thursday after Federal Reserve comments about rising inflation this year failed to lift the currency from near its three-year lows.

After its worst monthly performance since mid-2016, the dollar rose in Asian trading before falling back, with traders preparing for economic data due on Friday.

The dollar has struggled this year as expected monetary-policy tightening in other parts of the world, along with stronger global economic growth, encouraged investors to put more of their money elsewhere, particularly the euro zone.

The Fed left interest rates unchanged on Wednesday but said inflation is likely to accelerate this year, bolstering expectations rates will continue to rise under its incoming chairman, Jerome Powell.

Against a basket of currencies, the dollar was flat on the day at 89.103. It touched a three-year low of 88.438 earlier this week. Against the euro, the dollar was down 0.1 percent at $1.2429.

With U.S. interest rates and inflationary pressure rising and foreign investment in the United States growing, the dollar should not be weakening, Commerzbank analyst Thu Lan Nguyen said.

But the trend is so strong that even if U.S. economic data due on Friday, including non-farm payrolls, are stronger than expected, “I’m doubtful it will bring about a change for the dollar,” Nguyen said.

A survey on Thursday showed euro zone manufacturing was booming, supporting the euro. The single currency rose around 3.5 percent in January, during which it reached a three-year high above $1.25, amid expectations the European Central Bank will begin normalising monetary policy this year.

That prospect got a boost earlier on Wednesday after last month’s underlying euro zone inflation picked up pace.

The dollar did hold on to its gains against the yen. It edged up 0.5 percent to 109.725 yen, moving away from a four-month low of 108.28 plumbed on Friday.

Against the pound, the dollar also fell, reversing those earlier gains after the Fed meeting.

“While the knee-jerk reaction [to the Federal Reserve meeting] has been a higher dollar, we expect the positive effect on the dollar to fade rather soon,” ING analysts said.

“Not only is there already a fair degree of tightening priced in, but synchronised economic recovery elsewhere and still very much present U.S. political uncertainty ... suggest that the overnight dollar strength is unlikely to transform into a trend.”

The dollar did gain 0.8 percent against the Australian dollar to 79.97 cents after a recent run-up in the Australian currency came to and end.

The euro was broadly higher, gaining against the Swiss Franc to trade up 0.4 percent at 1.1600 francs.

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

Editing by Larry King

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