Dollar under pressure as Fed's Dudley cools rate-hike views

By Shinichi Saoshiro

TOKYO (Reuters) - The dollar nursed hefty losses against the yen and euro on Thursday after tumbling overnight when a top Federal Reserve official tempered expectations on the pace of future U.S. interest rate increases.

The dollar was steady at 117.97 yen after dropping 1.7 percent overnight. The greenback handed back all the gains made against its Japanese counterpart after the Bank of Japan adopted negative interest rates late last week, pushing it as high as 121.70.

The U.S. currency took a beating on Wednesday after William Dudley, president of the Federal Reserve Bank of New York, said financial conditions are considerably tighter and a weakening outlook for the global economy would have to be taken into account.

The dollar was weighed down by a survey from the Institute of Supply Management (ISM) showing activity in the vast U.S.services sector slowed to a near two-year low in January, adding another layer of uncertainty on the Fed's near-term policy path.

The euro traded at $1.1054, hovering near a 3-1/2-month high of $1.1145 scaled overnight. The single currency rallied 1.7 percent against the dollar after U.S. Treasury yields slipped to 10-month lows in the wake of the Dudley comments and downbeat data.

The market focus will now shift to U.S. factory orders data, and comments by Cleveland Fed President Loretta Mester and Boston Fed President Eric Rosengren later in the session.

"The dollar may rebound as it could have overreacted to the ISM non-manufacturing numbers. But it could still fall below 117 yen on fresh dovish comments from Fed officials," said Masafumi Yamamoto, chief FX strategist at Mizuho Securities in Tokyo.

"Of the Fed officials due to speak today, focus will be on whether Mester turns dovish."

Mester had told Reuters in an interview early last month that she prefers a slightly quicker rate hike pace.

Commodity-linked currencies held to their gains made on Wednesday on a sharp rebound in crude oil prices and the dollar's broad retreat.

The Canadian dollar hovered near a 7-week high of C$1.3757 to the dollar struck on Wednesday. The rally helped reverse weakness seen earlier in the year, when the loonie slumped to a 13-year trough of C$1.4689 amid a tumble in crude oil.

The Australian dollar was down 0.2 percent at $0.7155 , pulling back a little from a 1-month high of $0.7189 reached overnight.

(Editing by Shri Navaratnam)