FOREX-Dollar struggles on lower U.S. yields, Fed pause talk


* Dollar bulls concerned about steep U.S. Treasury yieldfalls

* Euro, yen's boost from previous session fades

* Investors eye U.S. November jobs data for trading cues

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

By Daniel Leussink

TOKYO, Dec 7 (Reuters) - The dollar struggled to recoveragainst its key rivals in Asian trade on Friday, hobbled byrenewed speculation of an imminent pause in the FederalReserve's tightening cycle, perhaps as soon as it delivers awidely expected rate hike later this month.

Of particular concern for dollar bulls has been the recentsharp falls in U.S. treasury yields, with an inversion of theyield curve signalling a sharp economic slowdown or even arecession down the road.

Investors are now watching Friday's U.S. non-farm payrollsrelease for November to gauge wage growth and labour marketstrength.

"We've already heard from (Fed Chairman Jerome) Powell thathe thinks the neutral rate has moved quite far in quite a shortperiod of time," said Bart Wakabayashi, Tokyo branch manager atState Street Bank.

"The guidance going forward will be key to yields and equitymarket moves, which right now foreign exchange markets seem tobe reacting to."

Dollar investors were given more reason to be cautious afterthe Wall Street Journal reported Fed officials are consideringwhether to signal a new wait-and-see mentality after a likelyrate increase at their meeting in December. urn:newsml:reuters.com:*:nL4N1YB5N6

The dollar index .DXY , which measures the greenbackagainst a basket of six major peers, was basically flat at96.804 in early trade.

The index shed 0.3 percent during the previous session,closing at one-week low and down 0.9 percent from a 17-monthpeak hit on Nov. 12.

The benchmark U.S. 10-year Treasury yield US10YT=RR waslast at 2.896 percent after dipping to its lowest level sincelate August overnight. urn:newsml:reuters.com:*:nL1N1YB286

The dollar has slipped after Fed Chairman Powell said lastweek that U.S. interest rates were nearing neutral levels, whichmarkets interpreted as signalling a slowdown in rate hikes.

The Fed is expected to raise interest rates again at its Dec. 18-19 meeting, which would be its fourth hike this year,but investors are already focusing on how much further it mightraise rates and whether a pause is imminent.

Interest rate futures implied traders see no more than onerate increase from the Fed in 2019, compared with previousexpectations for possibly two rate hikes, according to CMEGroup's FedWatch programme.

On Friday, the dollar rose slightly against the euro EUR= as well as the Japanese yen JPY= , trading at $1.1373 and112.70 yen per dollar, respectively.

The single currency had gained 0.3 percent against thedollar during the previous session while the yen rose about aquarter of a percent.

The Australian dollar AUD=D4 was down 0.1 percent at$0.7230, near a three-week trough of 0.7192 hit on Thursday.

The greenback has been pressured this week by an inversionin part of the U.S. yield curve seen as an early warning signfor a potential recession. urn:newsml:reuters.com:*:nL1N1Y91ZV

The spread between the two-year and five-year U.S. Treasuryyields inverted this week and the two-year/10-year spread was atits tightest in more than a decade amid a sharp fall inlong-term rates.

Historically, the economy has taken anywhere between 12months and 24 months to fall into a recession when the yieldcurve inverts. urn:newsml:reuters.com:*:nL1N1YA20L

Some market participants believe the dollar index may havepeaked out, State Street's Wakabayashi said.

"The dollar funding over the calendar year-end hasn't reallybeen as aggressive as we've seen in the past few years," hesaid.

"If the natural demand does not seem to be appearing in themarket, then I think the people who are holding on to thosedollars may look to unwind some of those trades."

(Reporting by Daniel LeussinkEditing by Shri Navaratnam) ((daniel.leussink@thomsonreuters.com; Twitter: @danielleussink;+81-3-6441-1825; Reuters Messaging:daniel.leussink.thomsonreuters.com@reuters.net))




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