Dollar posts steepest loss in three weeks on U.S. rate-hike doubts

By Richard Leong

NEW YORK (Reuters) - The dollar fell against a basket of major currencies on Friday, recording its biggest one-day fall in three weeks, on persistent doubts whether the Federal Reserve would raise interest rates again this year due to softening inflation data.

The greenback also broadly weakened versus commodity-linked currencies, which got a boost as global benchmark Brent futures recovered from a seven-month low.

Sterling rose for a third consecutive day after soon-to-depart Bank of England policymaker Kristin Forbes late on Thursday urged hiking UK rates immediately on fears that the pound's weakness could have a lasting upward effect on inflation.

Trading volume was muted in the absence of major economic data.

"This has been largely a week of consolidation among major currency pairings given the lack of economic data this week," said Omer Esiner, chief market strategist at Commonwealth Foreign Exchange in Washington.

The dollar index, which tracks the dollar against six major peers <.DXY>, fell 0.35 percent at 97.248, retreating further from a one-month peak reached on Tuesday.

The euro was up 0.44 percent at $1.1198, while the greenback slipped nearly 0.1 percent against the yen, to 111.25 yen.

The pound gained 0.4 percent at $1.2725.

The greenback rose earlier this week on comments from New York Fed President William Dudley, who said a tightening labor market would push up wages and cause U.S. inflation to reverse upward toward the Fed's 2 percent goal.

On Friday, St. Louis Fed chief President James Bullard said the central bank should wait on further rate hikes, while Cleveland Fed chief Loretta Mester said recent inflation weakness should not defer another rate rise this year.

Traders, however, were doubtful about another rate increase later this year as recent U.S. data on balance have fallen short of forecast.

On Friday, Markit's flash June reports on U.S. factory and services activity was weaker than expected, while the government said new-home sales rebounded more than expected in May.

"The data need to confirm the Fed's stance for another rate hike this year," Esiner said.

The futures market implied traders saw a 49 percent chance the Fed would raise rates in December , CME Group's FedWatch program showed.

Meanwhile, commodity-linked currencies rose with a rebound in crude oil prices. Brent crude futures settled 0.7 percent higher at $45.54 a barrel after hitting their lowest level since November on Thursday.

The Australian dollar was up 0.5 percent at $0.7575, while the New Zealand dollar was up 0.3 percent at $0.7288.

Click http://tmsnrt.rs/2kIQHol for graphic on world FX rates in 2017

(Additonal reporting by Jemima Kelly in Paris and Shinichi Saoshiro in Tokyo; Editing by Dan Grebler and Leslie Adler)

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