February 28, 2018 / 12:35 PM / 3 months ago

FOREX-Euro falls as dollar builds on gains, inflation slows

* Euro zone inflation slows, clipping euro bulls

* Fed chair’s testimony read as striking hawkish tone

* Yen edges higher after BoJ trims super-long JGB buying

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

By Tommy Wilkes

LONDON, Feb 28 (Reuters) - The euro fell to a six-week low on Wednesday after an upbeat assessment of the U.S. economy by Fed Chairman Jerome Powell boosted the dollar, while slowing euro zone inflation underlined the ECB’s caution in removing stimulus in the region.

After a strong start to the year in which investors speculated the European Central Bank would withdraw stimulus as the region’s economy recovered well, the euro has stumbled.

A more hawkish singal from the U.S. central bank and investors betting that the dollar had been oversold have hurt the euro in recent weeks.

Political developments are also making euro investors cautious. Italians are preparing to vote in a national election on Sunday, while the leading political parties in Germany decide on a coalition deal that would secure Angela Merkel a fourth term as chancellor.

The euro fell 0.2 percent to $1.2215, its lowest since Jan. 18, while the dollar against a basket of currencies rose 0.2 percent to 90.5, a three week high.

“The market perceived Powell to be hawkish and a softer CPI number out of Europe. It all feeds into a correction for the euro-dollar,” said Kit Juckes, Chief FX Strategist at Societe Generale in London.

Juckes said the euro could fall to as low as $1.20 but longer-term, unless the outlook for the euro zone economy changed substantially, he still saw the euro rising towards $1.30.

Euro zone inflation slowed to a 14-month low in February, underlining the European Central Bank’s caution in removing stimulus despite growth exceeding expectations.

DOLLAR GAINS

Powell’s testimony to U.S. lawmakers on Tuesday encouraged some investors to believe the Fed would raise rates four times this year rather than three.

The dollar has pulled itself from three-year lows hit on Feb. 16 on the back of rising U.S. Treasury yields and investors viewing the currency as oversold. But the jury is still out on whether the dollar is enjoying only a temporary bounce amid a prolonged period of weakness.

“The long-term risks of an expansionary monetary policy in times of a robust economy, which Powell mentioned briefly and that put pressure on the dollar only a few days ago, were now pushed aside by the market,” Commerzbank said.

The dollar fell 0.2 percent to 107.18 yen.

The yen edged higher after the Bank of Japan on Wednesday trimmed the amount of super-long Japanese government bonds it offered to buy at its regular debt buying operation.

BoJ officials have said that any changes to bond-buying operations are fine tuning and not meant as hints to future policy.

The yen, a safe haven currency that attracts demand in times of economic uncertainty, also held firm after weak factory data from China undermined investor risk appetite.

Sterling fell 0.6 percent to $1.3827 as comments by the European Union’s chief negotiator for Britain’s exit from the bloc underlined that a deal between the two sides is far from assured. The Swiss franc fell 0.3 percent versus the euro to 1.1524 francs.

Editing by Alison Williams

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