Dollar holds firm vs yen and euro on Fed hike view, pound bullish

By Ian Chua and Shinichi Saoshiro

SYDNEY/TOKYO (Reuters) - The dollar held at its highest in nearly two months against a basket of major currencies early on Friday, on track for a third week of gains as investors awaken to the risk of a hike in U.S. interest rates as early as next month.

New York Federal Reserve President William Dudley on Thursday said the U.S. economy could be strong enough to warrant a rate increase in June or July.

His comments reinforced surprisingly clear signals of a possibly imminent rate hike in minutes of the Federal Reserve's April policy meeting and underpinned an already-firm greenback.

The dollar index (DXY) last stood at 95.289, having been as high as 95.502 overnight - a level last seen on March 29. It was up nearly 0.8 percent this week and has risen 2.4 percent in the past three weeks.

"The market is currently ascribing around a 60 percent chance that the U.S. Fed will hike rates by the July meeting, and NAB has pencilled-in a July rate hike," said Tapas Strickland, economist at National Australia Bank.

"Fed officials are seemingly content with such a pricing," he said, adding an earlier June move could be complicated by the Brexit referendum which occurs a week after the June 14-15 Fed review.

Against the yen, the greenback reached a three-week high of 110.39 but dipped back to around 110.00 as weakness on Wall Street, hit by revived prospects of a near-term U.S. rate hike, shored up the safe-haven Japanese currency.

The U.S. currency was on track to gain 1.3 percent this week, during which it pulled significantly away from an 18-month low of 105.55 yen plumbed early in May after the Bank of Japan refrained from further monetary easing.

The euro also eased against the yen to 123.22 (EURJPY=R), though it remained tightly range-bound since bouncing off a three-year trough of 121.48 early this month.

On the dollar, the common currency hovered around $1.1200 , having touched its lowest in over seven weeks at $1.1180.

For potential cues the currency market awaited the G7 meeting of central bankers and finance ministers kicking off on Friday in the northern Japanese city of Sendai, although the event's potential impact may have lessened since the yen's bull run has ended.

"Had the yen remained strong going in to the G7 meeting, discussions would have revolved around the possibility of intervention. But the market has calmed down and the meeting is drawing less attention from participants," said Koji Fukaya, president of FPG Securities in Tokyo.

The yen's surge to an 18-month high versus the greenback earlier this month had prompted threats of intervention from Japanese authorities. U.S. Treasury Secretary Jack Lew, on the other hand, said that he saw no "disorderly" moves in the market that warrants intervention.

A standout performer was sterling, which rose broadly after a robust UK retail sales report diminished chances of an interest rate cut that some investors were factoring in.

The pound reached a two-week high of $1.4663 and was last at $1.4598. Its trade-weighted index peaked at 87.9 <=GBP>, its highest since Feb. 5.

In contrast, the embattled Australian dollar stood little changed at $0.7233 after briefly dipping below 72 U.S. cents for the first time since early March.