Dollar recovers from 7-week low, gains limited by U.S. policy doubts

By Gertrude Chavez-Dreyfuss

NEW YORK (Reuters) - The dollar rebounded from a seven-week low on Thursday, still feeling the positive effects of a record-setting Dow Jones Industrial Average the day before, although gains were tempered by persistent uncertainty surrounding the new U.S. administration's economic policy plans.

"There's a little more uncertainty with the dollar," said Sireen Harajli, currency strategist at Mizuho in New York.

"Obviously, the market expects the Fed to tighten in the second half of the year. That will continue to provide support for the dollar. But the big question right now is whether all these expectations on policy will be met by actual action."

The Dow, which hit more than 20,000 points on Wednesday, held above that key psychological level in mid-afternoon trading, keeping the dollar well supported. But U.S. yields slipped after gains in the morning session, amid a well-received U.S. 7-year Treasury auction.

While equities and Treasury yields have continued to rise in the past week, fuelled by U.S. President Donald Trump's signals of new public spending, the effect on the dollar over the last two weeks has been mixed. Investors were concerned about other parts of Trump's policy mix such as his leanings toward a protectionist trade policy.

Still, investors believed the dollar could make up some lost ground the next few weeks, with the Federal Reserve holding its first policy meeting this year on Feb. 1.

"Although the Fed is not expected to raise rates further at that meeting, the central bank is likely to provide a clearer outlook for rate hikes in 2017, especially in view of the projected U.S. inflation trajectory under Trump's proposed fiscal stimulus plans," said James Chen, head of research at Forex.com in Bedminster, New Jersey.

"With any more hawkish hints from the Fed, the dollar could continue to rebound."

In mid-afternoon trading, the dollar index was up 0.3 percent at 100.36, having hit a seven-week low of 99.793 in Asian trading.

The dollar gained 0.9 percent against the yen to 114.35 yen , while the euro fell 0.4 percent versus the greenback to $1.0700 .

The dollar earlier trimmed gains against both the yen and euro after a weak set of U.S. economic data, including an increase in initial jobless claims and a fall in new home sales.

Among G10 currencies, sterling has been the biggest gainer the past two weeks, up almost 6 percent from lows hit on Jan. 16. On Thursday though, sterling was down 0.2 percent at $1.2610 , despite a solid reading of Britain's fourth-quarter growth.

(Reporting by Gertrude Chavez-Dreyfuss, additional reporting by Patrick Graham in London; Editing by Meredith Mazzilli)