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FOREX-Dollar holds its gains as Fed set for lengthy inflation fight

       By Alun John
    HONG KONG, Aug 18 (Reuters) - The dollar touched a
three-week high on Thursday after minutes from the Federal
Reserve's July meeting pointed to U.S. interest rates staying
higher for longer to bring down inflation.
    The stronger greenback caused the pound briefly to
dip below $1.2 in early European trading, its lowest in three
weeks, the euro to drop to as low as $1.0146 and the
Japanese yen to drift down to 135.45 per dollar.
    This pushed the dollar index as high as 106.96, its
highest since late July.
    In the course of morning trading, however,  the euro,
sterling and yen all pared their losses, recovering to trade
flat on the day, leaving the dollar index at 106.65.
    Thomas Poullaouec, head of multi-asset solutions APAC at T.
Rowe Price, said he expected the dollar would "keep on smiling".
    "The 'dollar smile' theory holds that the currency does well
at each end of the global growth continuum, benefiting when
relative U.S. growth and rates are higher as well as from being
a 'safe haven' when global growth is declining - both of which
are happening," he said in emailed comments.
    "At this point, it appears the only thing that could slow
the dollar is a pivot by the Fed, which would likely only come
amid signs of much weaker growth in the U.S. or stronger
evidence of receding inflation. For now it looks like the dollar
will keep on smiling."
    Fed officials saw "little evidence" late last month that
U.S. inflationary pressures were easing, minutes released on
Wednesday showed.
    They flagged an eventual slowdown in the pace of hikes, but
not a switch to cuts in 2023 that traders until recently had
priced in to interest-rate futures.
    Traders see about a 40% chance of a third consecutive 75
basis point Fed rate hike in September, and expect rates to hit
a peak around 3.7% by March, and to hover around there until
later in 2023.
    In Asian trade, the greenback gained most against the
Antipodeans, especially the Aussie, which was dragged down as
weaker-than-expected wage growth weighed on Australia's rates
outlook.
    The Australian dollar fell to a one-week low of
$0.6899, following labour data that showed falls in both
employment and the jobless rate, before bouncing back to
$0.6951, up a fraction.
    China's yuan, meanwhile, continued to struggle as
weak consumption, low confidence, anaemic credit growth, a
property crisis and restrictive COVID-19 policies have cast a
long shadow over prospects for the world's second-largest
economy.
    The yuan fell nearly 0.2% to 6.788 per dollar, and also
dropped below its 200-day moving average against the euro.
.

    ========================================================
    Currency bid prices at 1137 GMT
 Description      RIC         Last           U.S. Close  Pct Change     YTD Pct     High Bid    Low Bid
                                              Previous                   Change
                                              Session
 Euro/Dollar                  $1.0188        $1.0178     +0.09%         -10.39%     +1.0193     +1.0146
 Dollar/Yen                   134.9050       134.9950    -0.02%         +17.35%     +135.4200   +134.8000
 Euro/Yen         Dollar/Swiss                 0.9516         0.9519      +0.03%         +4.38%      +0.9544     +0.9501
 Sterling/Dollar              1.2068         1.2050      +0.14%         -10.77%     +1.2079     +1.1995
 Dollar/Canadian              1.2888         1.2915      -0.19%         +1.96%      +1.2946     +1.2882
 Aussie/Dollar                0.6960         0.6937      +0.33%         -4.25%      +0.6970     +0.6899
 NZ                           0.6299         0.6281      +0.25%         -8.00%      +0.6299     +0.6248
 Dollar/Dollar


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 (Reporting by Tom Westbrook and Alun John
Editing by Kim Coghill and Mark Potter)

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