Dollar drifts off highs but Fed rate expectations underpin

TOKYO (Reuters) - The dollar took a breather in early Asia trading on Wednesday, but was still not far from a nearly nine-month peak against a currency basket as expectations for a year-end rate hike by the Federal Reserve remained intact.

The dollar index, which tracks the greenback against six major rivals, stood at 98.721 after rising as high as 99.119 overnight, its highest level since Feb. 1.

The U.S. currency has been held up by growing expectations the Fed is on track to raise rates by year-end, and even a somewhat weak consumer confidence reading did little to dent those views.

U.S. data released on Tuesday by the Conference Board showed the consumer confidence index dropped to 98.6 in October from a downwardly revised 103.5 in September. The market was pricing in a greater than 78 percent chance that the Fed would raise rates in December, according to CME Group's FedWatch programme.

Given the recent strength of the U.S. currency on a dollar index basis, "it will be interesting to note whether the Fed makes any acknowledgment of the amount of financial tightening that has occurred through dollar strengthening," said Bill Northey, chief investment officer of the private client group at U.S. Bank in Helena, Montana.

The euro was steady at $1.0886, after slipping to an almost eight-month low of $1.0848 on Tuesday.

Against the yen, the dollar crept lower 0.1 percent to 104.13 , down from a roughly three-month high of 104.87 yen touched in overnight U.S. trading.

Sterling, meanwhile, edged down 0.1 percent to $1.2177 , pressured by comments from Bank of England Governor Mark Carney. The governor cast doubt on expectations for more monetary stimulus in Europe, saying that the BoE would "undoubtedly" take sterling's weakness into account at its rate-setting meeting next week.

Carney's comments helped send the pound to a two-week low of $1.2082.

(Reporting by Tokyo markets team; Editing by Shri Navaratnam)