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FOREX-Dollar holds firm as Fed officials say hikes to continue; yen slides

By Kevin Buckland

TOKYO, Nov 15 (Reuters) - The U.S. dollar rose against the yen and held firm against the euro on Tuesday after more Federal Reserve officials made the case for even tighter U.S. monetary policy.

The dollar index, which measures the currency against six counterparts including the yen and euro, slipped 0.1% to 106.85, holding most of its hefty gains from Monday, when it rebounded from the previous session's three-month low of 106.27.

The index tumbled 3.9% last week, its worst performance since March 2020, after U.S. consumer prices rose less than expected, stoking speculation a peak in rates might be near.

Fed Vice Chair Lael Brainard on Monday echoed weekend comments by Fed Governor Christopher Waller that interest rates need to keep rising to battle inflation, although potentially at a slower pace. Brainard also stressed that risks will become more two-sided.

Money markets are currently pricing in an 89% probability that the Federal Open Market Committee (FOMC) will slow the pace of hikes to a half point at its next meeting on Dec. 14, against 11% odds for another 75 basis point increase.

"The U.S. dollar is trying to form a post-CPI base, with Waller doing his best but the more influential Brainard somewhat less hawkish," said Sean Callow, a senior currency strategist at Westpac.

For the dollar index, "the September highs above 114 are looking increasingly like the cyclical peak, but we expect support to start to emerge into the 105 area," Callow said.

The dollar gained 0.3% to 140.34 yen, adding to its 0.84% overnight rebound from a 2-1/2-month low of 138.46. It dropped 5.39% last week, the most in 14 years.

Sterling edged 0.13% higher to $1.1775, after slipping at the start of the week from a 2-1/2-month top at $1.1855 from Friday.

The euro was little changed at $1.03315 following its retreat from a three-month high of $1.0364.

The risk-sensitive Australian dollar added 0.14% to $0.67105, moving back toward Monday's nearly two-month peak of $0.6720, buoyed by key trading partner China's moves to ease COVID-19 restrictions and support its property market.

There was little reaction in the Australian currency from minutes of the Reserve Bank of Australia's latest meeting, which showed policymakers considered a 50 bps hike before opting for another 25 bps bump.

"The Aussie has made some progress on cross rates so far this week, with help from China," said Westpac's Callow, adding there is the potential for a rise to $0.6775 in coming days.

"However, global equities are still skittish, limiting Aussie upside."

The yuan continued to firm, garnering additional support from an easing of strained China-U.S. tensions following Joe Biden's summit with Xi Jinping.

The onshore Chinese yuan was changing hands at 7.0506 at midday, 204 pips firmer than the previous late session close, largely shrugging off a surprise contraction in retail sales.

(Reporting by Kevin Buckland; Editing by Ana Nicolaci da Costa and Tom Hogue)