Dollar recovers slightly after losses triggered by Powell's comment

NEW YORK (Reuters) - The greenback gained modestly on Thursday as investors continued to digest comments from Federal Reserve Chairman Jerome Powell on Wednesday that took a more dovish turn than expected and sent the dollar tumbling.

An employee counts U.S. dollar banknotes at a currency exchange office in Jakarta, Indonesia October 23, 2018. Picture taken October 23, 2018. REUTERS/Beawiharta

Powell said the central bank’s policy rate is now “just below” estimates of a level that neither brakes nor boosts a healthy U.S. economy, comments that many investors read as signaling the Fed’s three-year tightening cycle is drawing to a close.

Interest rate futures traders are now pricing for only one rate hike in 2019, according to the CME Group’s FedWatch Tool, below Fed projections of three increases during the year.

“You saw a pretty massive repricing yesterday of Fed expectations and the dollar and markets may have overreacted a little bit to it,” said Erik Nelson, a currency strategist at Wells Fargo in New York. “The room for downward repricing in Fed expectations from here may be kind of limited.”

Minutes from the Fed’s Nov. 7-8 meeting on Thursday showed that almost all Fed officials at their last meeting agreed another interest rate increase was “likely to be warranted fairly soon,” but also opened debate on when to pause further hikes and how to relay those plans to the public.

The dollar index .DXY briefly dipped on the release of the minutes, before moving back to trade little changed. The index gained 0.13 percent on the day to 96.915.

The greenback weakened earlier on Thursday after data showed that inflation slowed in October, despite a jump in consumer spending.

The personal consumption expenditures (PCE) price index excluding the volatile food and energy components edged up 0.1 percent after increasing 0.2 percent in September.

The tepid inflation “takes some pressure off the Fed at the margin,” said Nelson.

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, jumped 0.6 percent last month as households spent more on prescription medication and utilities.

Investors are also focused on the G20 summit in Buenos Aires on Friday and Saturday, where Trump and his Chinese counterpart, President Xi Jinping, are scheduled to discuss contentious trade matters.

Trump said on Thursday said there was “a long way to go” on tariffs with China and urged companies to build products in the United States to avoid them.

Elsewhere, the pound lost about 0.4 percent against the dollar GBP= on concern about the UK parliament's vote on Brexit and after the Bank of England warned of risks to the currency if Britain leaves the European Union in a disorderedly manner.

Reporting by Karen Brettell; Editing by Susan Thomas and Jonathan Oatis