Dollar on defensive after Fed's Brainard quells Sept rate hike talk

By Hideyuki Sano

TOKYO (Reuters) - The dollar was on the defensive on Tuesday as markets remained hostage to seesawing speculation on the outlook for U.S. rates, with dovish comments from a Federal Reserve policy maker providing the latest catalyst.

Investors now see less chance of a U.S. rate hike next week after Federal Reserve Governor Lael Brainard on Monday warned against the Fed removing support for the economy too quickly.

"We can stick with our main scenario that the Fed won't raise rates in September. All the talk about a possible rate hike in September turned out to be noise," said Koichi Yoshikawa, executive director of finance at Standard Chartered Bank's Tokyo branch.

The dollar index <=USD> slipped to 95.10 from around 95.35 at the end of last week.

Fed Funds rate futures <0#FF:> are now pricing in only about 10 percent chance of a rate hike at the Fed's next policy meeting on Sept 20-21, compared to about 35 percent in late August, when some Fed officials openly discussed the possibility of a September rate hike.

Against the yen, the dollar slid to 101.72 yen from Monday's high of 102.82 yen, though it held above last week's low of 101.20.

The yen has been steadily rising so far this year as investors grew sceptical that even the Bank of Japan's massive stimulus over the past three years will have limited impact in boosting Japan's inflation.

For now though the Japanese currency is likely to move between 100 and 103 yen before the BOJ's policy meeting, to be held during the same two days as the Fed's.

The BOJ is expected to unveil the results of a comprehensive review of its policy it had promised in July, in which many market players believe the central bank will indicate its preference for a steeper yield curve to cushion the blow on banks from negative interest rates.

Some market players think the BOJ will only announce the framework of future easing without making a major policy change such as cutting interest rates further.

The euro was little changed at $1.1238.

In Asia, a raft of Chinese economic data due at 10:00 a.m. (0200 GMT), including industrial output and retail sales, will be a key focus. [ECONCN]

Europe will see UK consumer and wholesale inflation data at 9:30 a.m. (0830 GMT) ahead of the Bank of England's policy meeting later this week.

A high inflation reading could dampen expectations of further easing by the BoE and lift the British pound.

Sterling stood at $1.3333 , up from $1.3270 late last week but off its seven-week high of $1.3445 hit a week ago.

(Reporting by Hideyuki Sano)