Dollar extends fall as bets on hawkish European policy heat up

By Sam Forgione

NEW YORK (Reuters) - The U.S. dollar touched its lowest level against the euro in a year on Wednesday after hawkish comments from the head of the Bank of England added to speculation that monetary policy in Europe was turning hawkish.

The dollar also was weaker in the wake of a decision on Tuesday to delay a U.S. Senate vote on a bill to repeal and replace Democratic former President Barack Obama's 2010 healthcare law.

The euro extended the prior session's rally against the dollar, which had sent it to its strongest one-day percentage gain against the greenback in more than a year. Sterling also jumped after BoE Governor Mark Carney said the central bank is likely to need to raise interest rates as the British economy comes closer to operating at full capacity.

Speaking at a European Central Bank conference in Portugal, Carney said the BoE will debate that matter "in the coming months."

Carney's remarks convinced traders that European monetary policy was shifting in a more hawkish direction, analysts said, just a day after ECB President Mario Draghi opened the door to tweaks in the central bank's stimulus policy, fuelling market expectations that the ECB will announce a reduction of stimulus as soon as September.

Analysts said Draghi's comments continued to support the euro even as sources familiar with the ECB chief's thinking said Wednesday he intended to signal tolerance for a period of weaker inflation, not an imminent policy tightening.

"There is a bit of a concern in the markets about the fact that the balance of monetary policy expectations is moving a little bit in a more hawkish direction in Europe," said Alvise Marino, FX strategist at Credit Suisse in New York.

The euro rose as much as 0.5 percent against the dollar to a one-year high of $1.1390 after jumping 1.4 percent on Tuesday. The dollar index, which measures the greenback against a basket of six major rivals, fell as much as 0.4 percent to hit a more than seven-month low of 95.967 <.DXY>.

The dollar inched lower against the yen after hitting a more than one-month high of 112.46 on Tuesday.

The announcement on Tuesday that U.S. Senate Republican leaders had postponed a vote on the healthcare overhaul continued to fuel skepticism that U.S. President Donald Trump's administration would realize pro-growth infrastructure spending and tax cuts, hurting the dollar.

"There is a pricing-in of less of a Trump trade," said Axel Merk, president and chief investment officer of Palo Alto, California-based Merk Investments. "We're not getting some real reform in the U.S."

(Reporting by Sam Forgione; additional reporting by Patrick Graham in London; Editing by Chizu Nomiyama and Paul Simao)

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