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FOREX-Dollar extends declines as traders pull back rate hike bets

(Adds analysts' comments and U.S economic data results, updates prices, changes dateline pvs LONDON)

By John McCrank

NEW YORK, Aug 11 (Reuters) - The dollar extended its losses against other major currencies on Thursday, a day after a report showed U.S. inflation was not as hot as anticipated in July, prompting traders to dial back expectations for rate hikes by the Federal Reserve going forward.

Investors slashed bets on the possibility that the Fed will raise interest rates by 75 basis points for a third consecutive time when it meets in September after data on Wednesday showed U.S. consumer prices were unchanged in July.

Fed funds futures traders are now pricing in a 66% chance of a 50 basis-point hike and a 34% chance of a 75 basis-point increase in September.

That sent stock markets higher and the dollar broadly lower as traders readjusted their forecasts to factor in the chance that decades-high inflation may have peaked.

"Risk appetite has rebounded across the financial landscape on the prospect of less restrictive monetary policy from the Federal Reserve," said Karl Schamotta, chief market strategist at Corpay.

The dollar index was down 0.257% at 104.95 at 10:45 a.m. EDT (1445 GMT), after recording its biggest daily fall in five months, of 1%, the previous day.

The greenback's intraday drop was even larger, but it clawed back some of its losses after Fed officials attempted to temper expectations of significantly looser policy, with Neel Kashkari telling a conference on Wednesday that the central bank was "far, far away from declaring victory" on inflation.

"The loosening of financial conditions that is occurring across the global financial system is not in alignment of where Fed officials would like to take policy, so the reality for FX traders is that there may be a short horizon on market movements right now," said Schamotta.

Data on Thursday showed that U.S. producer prices unexpectedly fell in July amid a drop in the cost for energy products and that underlying producer inflation appears to be on a downward trend, while jobless claims rose for a second straight week in a labor market that remains tight.

The euro and Japanese yen were among the currencies to benefit from the dollar's weakness and both added to the previous day's gains.

The euro was last up 0.34% at $1.03345.

The yen gained 0.22% to 132.59 yen per dollar after a rise of more than 1% on Wednesday.

The reason for the yen's strength is that the Bank of Japan has interest rates on hold indefinitely, said Marshall Gittler, head of investment research at BDSwiss Holding Ltd.

"If global inflation starts to slow, then other central banks may also cut back on their tightening plans, meaning that the expected interest rate gap between them and the U.S. won't narrow that much," he said.

"But since Japan isn't expected to raise rates at all, any change in U.S. rate expectations has a one-to-one impact on the expected spread between U.S. and Japan rates."

Sterling edged up 0.06% versus the dollar to $1.2224, after gaining more than 1% the previous day.

(Reporting John McCrank in New York; additional reporting by Iain Withers in London Editing by Toby Chopra and Matthew Lewis)

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