TOKYO, July 10 (Reuters) - The dollar edged toward a three-week high against a basket of major currencies on Wednesday, as an unwinding of bets on deep USA interest rate cuts pushed Treasury yields higher.
The MSCI Asia Pacific Index climbed 0.3%.
The Dow Jones Industrial Average joined the S&P 500 at an all-time high after the Fed chairman said in prepared remarks that downside risks to the economy remain, even after Friday's strong jobs report forced investors to recalibrate rate-cut expectations.
The greenback hit session lows versus the euro and yen after Powell's comments, which reinforced expectations the Fed will cut interest rates for the first time in a decade at its next monetary policy meeting later this month.
Cash market futures 0#FF: are nonetheless absolutely pricing in a 25 foundation level (bps) lower on the Fed's subsequent coverage assembly on July 30-31, however have virtually priced out a bigger 50 bps discount.
"We still think the odds favour a 25 bps "insurance" cut", said Kevin Cummins, a senior U.S. economist at NatWest Markets.
Elsewhere, Kansas City Fed president Esther George said USA inflation was unlikely to surge anytime soon, but noted that keeping interest rates too low for too long could put financial stability at risk. "If we are talking about a stronger dollar, then we have to bear in mind comments from President Donald Trump last week, who said, 'Well, perhaps we should start manipulating the dollar'".
Overnight, Atlanta Fed president Raphael Bostic said the Fed was debating the pros and cons of allowing the world's largest economy to run "a little hotter".
Lurking in the background, United States and Chinese trade officials held "constructive" talks on trade by phone on Tuesday, White House economic adviser Larry Kudlow said.More news: US Missiles Found in Libyan Rebel Camp Were First Sold to France
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Wall Street had been dully circumspect, with the Dow ending Tuesday down 0.08 percent, while the S&P 500 added 0.12 percent and the Nasdaq 0.54 percent.
The cooling in United States rate fever has seen bonds give back just a little of their rally.
Barring any significant developments on the US-China Trade War front, the dollar index may hold within its 95.80-98.30 range for the near term while traders wait for more clarity on Fed policy through the rest of the year.
The dollar fell 0.2 per cent against the Japanese yen to 108.66 in early morning trading, while the euro rose 0.3 per cent against the dollar to $1.1244.
The yield on 10-year Treasuries fell two basis points to 2.04%.
The Mexican peso was nursing a few bruises after sliding on Tuesday when the country's moderate Finance Minister Carlos Urzua suddenly resigned, citing "extremism" in economic policy.
The Canadian dollar was on the defensive before a Bank of Canada meeting, in case policymakers tried to slow the currency's recent rally.
Oil prices rose on Middle East tensions and news that US stockpiles fell for a fourth week in a row. US crude was up 82 cents to $58.65 a barrel. Brent crude futures gained 64 cents to $64.80.