Dollar climbs to cap strong week as bears grow wary

NEW YORK (Reuters) - The dollar edged higher against a basket of major currencies on Friday, extending its recovery from a three-year low last week, as the potential for a more aggressive U.S. Federal Reserve prompted investors to pare bearish bets against the greenback.

FILE PHOTO: U.S. Dollar banknotes are seen in this photo illustration taken February 12, 2018. REUTERS/Jose Luis Gonzalez/Illustration

The dollar index .DXY, which measures the greenback against a basket of six other major currencies, was up 0.12 percent at 89.847. The index hit a three-year low of 88.253 on Feb. 16.

“You have seen sentiment around the dollar shift,” said Charles Tomes, senior investment analyst and trader at Manulife Asset Management in Boston.

“A lot of market participants are taking some risk off the table if they did have longs in other strategies,” he said.

Rising U.S. Treasury yields, a view that the dollar’s selloff had been overdone, and minutes from the Fed’s January rate-setting meeting that offered a relatively upbeat tone helped the index notch a gain of 0.8 percent this week.

“The story defining the dollar’s impressive appreciation this week continues to revolve around heightened speculations of higher U.S. interest rates in 2018,” Lukman Otunuga, research analyst at futures brokerage FXTM in London, said in a note.

The Fed, looking past a recent stock market sell-off and concerns about inflation, sees steady growth continuing and no serious risks on the horizon the might pause its planned pace of rate hikes, the central bank’s Washington-based Board of Governors wrote in its semiannual report to Congress on monetary policy.

The report was released Friday ahead of new Chairman Jerome Powell’s first public outing next week, when he testifies separately before House and Senate committees.

“If investors were short the U.S. dollar, they don’t want to take on that risk in case he is more hawkish,” Tomes said.

The euro edged lower against the dollar, pressured by the greenback’s stronger tone and by investor caution ahead of the outcome of the Italian general election on March 4.

A German Social Democrats’ poll of its members on joining another coalition government with Chancellor Angela Merkel’s conservatives is also due that day, two big political risk events for markets.

“For people that are bullish on the euro, there is nothing new to get people to increase positions,” he said.

The kiwi NZD= slipped as investors bet interest rates in New Zealand will remain at record lows while the United States continues to tighten policy.

The Canadian dollar CAD= rose against its U.S. counterpart after data showed Canada's inflation cooled less than economists had expected.

Reporting by Saqib Iqbal AhmedEditing by Chizu Nomiyama