Dollar rises to session high after Warsh comments, set for weekly gain

By Chuck Mikolajczak

NEW YORK, Aug 28 (Reuters) - The U.S. dollar rose on Friday, extending gains to a session high after U.S. Federal Reserve Chair Kevin Warsh hinted that interest rate hikes may be needed should policymakers doubt that inflation is headed back toward the central bank's 2% target.  

In his debut speech at the Jackson Hole symposium of central bankers, Warsh said the Fed will "have work to do" should inflation not appear to be cooling, in remarks that acknowledged financial conditions do not appear restrictive and marked the closest he has come to recognizing that interest rate hikes may be needed to ease price pressures.

Expectations for a rate hike of at least 25 basis points at the Fed's September meeting jumped to about 50% following Warsh's comments, up from about 35% before the speech. 

"At least for the time being, we're getting more of the same Warsh-speak that we saw prior to any of the Fed decisions that he had been a part of. Meaning he's saying a lot, but none of this seems really substantive," said Eugene Epstein, head of trading and structured products at Moneycorp in Stamford, Connecticut. 

"If the Fed doesn't follow through again, I don't want to be dramatic and say that credibility is getting eroded, but I think a better way to phrase it is that the market's going to be looking at his commentary going forward with a giant grain of salt." 

The dollar index, which measures the greenback against a basket of currencies, rose 0.35% to 99.46 after hitting 99.592, its highest level since August 19, with the euro down 0.34% at $1.1611.

GREENBACK EXTENDS WEEKLY GAINS

For the week, the greenback is up nearly 0.7% and on track for its biggest weekly gain in five weeks, while the euro is off about 0.6% and poised for its first weekly drop after four straight weeks of gains. 

Warsh's comments came after a trio of Fed officials on Thursday voiced their concerns about stubbornly above-target inflation, although Boston Federal Reserve President Susan Collins said the latest inflation reading was "mixed," while she continues to see gradual disinflation.  

Against the Japanese yen, the dollar strengthened 0.31% to 159.88 and was on track for its third weekly gain in four weeks. Data showed annual core inflation in Tokyo accelerated in August for the third straight month, a sign of broadening price pressures, which bolsters the case for an interest rate hike as soon as next month.

Sterling weakened 0.18% to $1.3566 and was on track to snap a four-week streak of gains.

The Canadian dollar weakened 0.24% versus the greenback to C$1.388 per dollar. Canada's economy rebounded sharply in the second quarter after six months of virtually no growth, aided by a strong jump in exports and solid domestic demand, data showed, though a new round of U.S. tariffs brings new uncertainty.

The loonie is down about 0.9% against the greenback this week, which would snap a four-week run of gains and mark its biggest weekly drop in just over two months as trade talks between the U.S. and Canada collapsed last weekend, prompting the announcement of tariffs by both countries. 

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(Reporting by Chuck Mikolajczak in New York; Additional reporting by Jiaxing Li in Hong Kong and Johann M Cherian in Bengaluru; Editing by Chizu Nomiyama and Matthew Lewis)