By Vatsal Srivastava
SINGAPORE (Reuters) – The dollar firmed against most major counterparts on Friday, as investor focus shifted to an expected U.S. interest rate hike next week, although gains are likely to be capped on greater uncertainty about next year's policy outlook.
The greenback found broad support as the euro and pound came under pressure after downbeat comments from the European Central Bank president about the outlook for the euro zone and renewed concerns about a hard Brexit.
Analysts say the next catalyst for larger moves in the currency markets will be the Federal Reserve's Dec. 18-19 meeting.
The Fed is widely expected to raise interest rates by 25 basis points, its fourth rate hike this year though greater focus will center on the policy outlook for 2019, over which there is more uncertainty.
"There is a lot of disagreement in the markets over the Fed's rate hike course in 2019 with traders expecting anywhere between one to four rate hikes," said Michael McCarthy, chief markets strategist at CMC markets.
McCarthy said markets will be watching for any revisions in the Fed's growth and inflation outlook. He sees more upside to the dollar versus the euro and yen if its forward guidance paints a stronger picture for the U.S. economy.
The yen was slightly stronger at 113.48 to the U.S. currency. The dollar has gained 1.2 percent versus the Japanese currency in the past six trading sessions as interest rate differentials between U.S. and Japan make the greenback a more attractive bet than the yen.
The dollar (DXY) has been the biggest winner of 2018, having gained 5.3 percent over its peers so far this year. The Fed is the only major central bank to raise rates on the back of a robust economy, accelerating inflation and steady corporate profits.
However, in recent weeks, a softening in U.S. Treasury yields and tepid data have led some analysts to forecast a peak for the dollar. Comments from Fed officials have also been read as dovish by the market, where they have signaled that interest rates are nearing their "neutral range".
The offshore Chinese yuan traded at 6.8867, slipping 0.15 percent against the dollar. The yuan weakened following weaker-than-expected data that showed China's November retail sales grew at the weakest pace since 2003 and industrial output rose the least in nearly three years.
With economic growth faltering, most analysts are expecting support measures from Chinese authorities including interest rate cuts to support the economy which would likely keep the yuan under pressure.
Negative sentiment out of China did not bode well for the Australian dollar , which lost 0.5 percent to $0.7189. China is Australia's largest trade partner.
The euro (EUR=) traded flat on Friday, having struggled to stay in positive territory in the previous session.
The ECB formally ended its 2.6 trillion euro crisis-fighting bond purchase scheme on Thursday. However, monetary policy is most likely to remain accommodative as ECB President Mario Draghi warned that the euro area's growth outlook is likely to remain weak amid threats of a global trade war and the prospect of a hard Brexit.
Sterling lost 0.2 percent, changing hands at $1.2627 in Asian trade after British Prime Minister Theresa May appealed to fellow EU leaders for concessions to help her win support in parliament next month for a deal that can smooth Britain's exit from the European Union.
The pound had posted two consecutive sessions of gains versus the greenback after Prime Minister May fought off a bid to unseat her by colleagues unhappy with her Brexit plans.
In New Zealand, the kiwi fell 0.9 percent to $0.6796 after the central bank said it was considering almost doubling the required capital banks would need to hold to bolster the financial system's capacity to handle any shocks.