Dollar drifts lower before possible US interest rate hike

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The dollar drifted lower on Friday in thin, listless trading ahead of next week's Federal Reserve policymaking meeting that may yield the first interest rate increase in the United States in nearly a decade.

The dollar index, a basket of currencies valued against the dollar, traded in a small range and rose briefly when the government reported U.S. producer prices were unexpectedly flat during August.

Tame inflation, combined with a rapidly tightening labor market, are a dilemma for the Fed officials meeting Wednesday and Thursday to contemplate raising rates. A policy statement will be issued on Thursday.

Investors and currencies analysts were divided over whether a rate hike was likely and would keep the dollar in a tight trading band through next week, according to Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington.

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"A lot of investors are willing to remain sidelined until we either get some sort of macro development or some sort of clearer indication that the Fed is more biased toward either raising rates or not raising rates," Esiner said.

Another economic indicator issued on Friday, The University of Michigan's preliminary September reading on overall U.S. consumer sentiment index, was unexpectedly soft and briefly knocked the dollar down before it regained the losses.

The September survey slid to 85.7, compared with the final reading of 91.9 in August and a median forecast of 91.2.

The dollar index was last off 0.35 percent and reflected a 0.60 percent decline in the dollar against the euro. The yen was flat against the dollar at 120.5 yen and mixed against other major currencies.

The dollar gave up early gains against the Swiss franc and was last off 0.50 percent to 0.9888 franc.

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The franc also weakened to more than 1.10 francs per euro for the first time since the Swiss National Bank lifted a currency cap last January.

The franc's move reflected some easing of the anxiety afflicting markets in the past month, with dealers saying the franc had been hit by a trimming of bets on the franc by long-term investors.

"The break of the psychological resistance at 1.1000 has triggered heavy franc selling," said Peter Rosenstreich, head of Market Strategy at Swissquote Bank.

"Should larger, macro risk events hit the market, such as Greek uncertainty or China growth worries, we will see a flight back to the safe-haven franc."