Dollar gains as Fed officials keep door open for September hike

By Gertrude Chavez-Dreyfuss

NEW YORK (Reuters) - The dollar rose to one-week highs on Friday for a fourth straight session of gains after some Federal Reserve officials did not rule out an interest rate hike next month despite this week's market meltdown.

The dollar index, a gauge of the greenback's value against six major currencies, rebounded from seven-month lows struck on Monday and posted its largest weekly gain in a month as financial markets calmed down after recent turmoil.

The index extended gains after Federal Reserve Vice Chair Stanley Fischer said the U.S. central bank can't wait for the case on hiking interest rates to be overwhelming. But he was undecided whether to raise rates in September.

Atlanta Federal Reserve President Dennis Lockhart, a voting member of the rate-setting Federal Open Market Committee, saw the odds of a rate hike in September as roughly even.

Traders in the interest rate market have therefore priced in a more than 50 percent chance of an October increase.

Currency investors are bracing for a slew of U.S. economic data, including payrolls, which could help the Fed decide what to do next on monetary policy.

"The August nonfarm payrolls report may play an increased role in shaping market expectations, and a further expansion in U.S. job growth paired with a down-tick in the unemployment rate may boost bets for a rate hike in September," said David Song, currency analyst at DailyFX in New York.

Earlier, St. Louis Fed President James Bullard and Cleveland Fed President Loretta Mester voiced no panic about the recent market turmoil.

"Nothing has happened here that is so radically changing the U.S. outlook that the basic trajectory of policy would change," Bullard said on the sidelines of a global central bankers' conference in Jackson Hole, Wyoming.

Mester echoed Bullard's sentiment, saying the U.S. economy could handle a modest rate hike, although she did not commit to backing a move next month.

In late trading, the dollar index <.DXY> was up 0.5 percent at 96.101, having hit a one-week high of 96.324. After diving to a seven-month trough of 92.621 on Monday when global stock markets went into a tailspin, the index has rebounded 3 percent.

The greenback rose 0.4 percent to 121.44 yen , recovering from Monday's seven-month low of 116.15.

The euro, meanwhile, fell 0.6 percent to $1.1180 , well off its Monday high above $1.1700 when the sell-off in global markets led investors to unwind euro-funded carry trades.

(Reporting by Gertrude Chavez-Dreyfuss; Additional reporting by Anirban Nag in London; Editing by Meredith Mazzilli and James Dalgleish)

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