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FOREX-Dollar tries to find footing as recession worries simmer

By Kevin Buckland

TOKYO, Dec 8 (Reuters) - The U.S. dollar clawed back some of the previous day's declines on Thursday as investors weighed the outlook for Federal Reserve policy amid simmering fears that high interest rates could spur a recession.

With Japan's own long-term yields pegged near zero by the central bank, the yen slid as long-term U.S. Treasury yields clambored off three-month lows.

Meanwhile, the yuan hovered close to an almost three-month high after China revealed a loosening of stifling COVID restrictions.

The U.S. dollar index - which gauges the greenback versus six counterparts - ticked up 0.19% to 105.33 in the Asian session, bouncing after a 0.42% slide overnight, its first decline since Friday.

While investors have been anticipating the Fed will soon slow its tightening pace, recent upbeat U.S. employment, services and factory data have added to investor uncertainty over the policy outlook.

Money markets price 91% odds that the policy-setting Federal Open Market Committee will raise rates by half a point on Dec. 14, with just 9% probability for another 75 basis point increase. Rates are now seen peaking at just below 5% in May.

Fed policy makers will have the benefit of seeing the latest consumer inflation data a day before the decision.

"Uncertainty about the inflation outlook suggests the risk remains high that the FOMC will keep policy at a restrictive level for longer and in turn drag the economy into a deeper downturn," Carol Kong, a strategist at Commonwealth Bank of Australia, wrote in a client note.

"The FOMC may step down the pace of its rate hikes to 50bp next week, but unless inflation decelerates consistently, upside risks to FOMC policy remain."

Long-term Treasury yields plunged to an almost three-month low of 3.402% overnight, but bounced back to around 3.46% in Tokyo.

The dollar-yen pair, which is extremely sensitive to U.S. yields, jumped 0.37% to 137.06 following a 0.34% depreciation overnight. More broadly though, the pair continued its consolidation after slumping to the lowest level since mid-August last week at 133.62.

On the U.S. political front, the Democrats strengthened their razor-thin majority in the senate after a narrow win for incumbent Raphael Warnock in Georgia over Donald Trump-backed former football star Herschel Walker, although the impact on the dollar was limited.

"I think the dollar's primary catalyst will remain what the Fed does, as Congress seems like it will still be divided after the 2024 presidential elections, unless the Republicans somehow get their act together and have a very strong red wave, but that doesn't seem like the way things are going to play out," said Edward Moya, a senior market analyst at OANDA.

The euro was flat at $1.0505, while sterling eased 0.18% to $1.2190.

The euro has risen recently on signs that Europe's economic downturn may not be as bad as previously feared. The European Central Bank will review policy on Dec. 15. The Bank of England sets policy the same day.

The risk-sensitive Australian and New Zealand dollars eased slightly, with the Aussie down 0.16% at $0.67145 and the kiwi off 0.06% at $0.6353. The currencies gained 0.56% and 0.61% respectively overnight.

The U.S. dollar edged 0.1% higher to 6.9670 yuan in offshore trading, clawing back some of its 0.34% decline from Wednesday, when the Chinese government announced a relaxation of some COVID-19 measures that have badly hampered the economy.

(Reporting by Kevin Buckland; Editing by Simon Cameron-Moore)