Dollar firms on divergent monetary policy expectations

By Lisa Twaronite

TOKYO (Reuters) - The dollar firmed slightly against a basket of currencies early on Friday, as traders were caught in a tug-of-war between rising expectations of monetary easing by other major central banks and fading hopes for more rate hikes from the Federal Reserve.

The dollar index, which tracks the greenback against a basket of six major rivals, rose about 0.1 percent to 99.185, below Thursday's more than one-month session high of 99.790. But it was still on track to mark a gain of 0.2 percent for the week.

The euro skidded on Thursday after unexpectedly strong remarks from European Central Bank President Mario Draghi suggesting the bank could launch additional stimulus measures in the euro zone within months, against a backdrop of fading growth and inflation prospects.

"Downside risks have increased again amid heightened uncertainty about emerging market economies' growth prospects, volatility in financial and commodity markets, and geopolitical risks," Draghi told a news conference. "We are not surrendering in front of these global factors."

The euro was down about 0.2 percent at $1.0857, poised for a weekly dip of about 0.6 percent, though it managed to bounce off a two-week low of $1.0776 touched in the wake of Draghi's comments.

"This may be a function of the existing overhang of spec short EUR positions and of course doubts that the Fed will raise rates again any time soon," wrote Sean Callow, senior currency strategist at Westpac in Sydney, who noted that a March hike is only 22 percent priced in.

U.S. data on Thursday reinforced doubts that the Fed would unveil more tightening anytime soon. Weekly jobless claims climbed to a six-month peak, raising questions about the strength of the labour market, and factory activity in the mid-Atlantic region contracted for a fifth straight month.

The dollar edged up about 0.1 percent against the yen to 117.79, well above Thursday's session low of 115.97, which was its deepest nadir since January 2015, and on track for a weekly gain of 0.5 percent.

The euro eased down about 0.1 percent against its Japanese counterpart to 127.88 after notching a low of 126.17 on Thursday, its lowest since April.

The Bank of Japan is "taking a serious look" at expanding its monetary easing measures as sliding oil prices make it harder to reach its 2 percent inflation target, the Nikkei newspaper reported on Friday.

A stronger yen and falling stock prices will loom large at the central bank's next two-day policy meeting on Jan. 28 and 29, the report said.

Bank of Japan Governor Haruhiko Kuroda said on Thursday that he is not thinking of adopting a negative interest rate policy now, signalling that any further monetary easing will likely take the form of an expansion of its current massive asset-buying programme.

(Editing Shri Navaratnam)