×

FOREX-Dollar catches breath after plunging on collapse of US healthcare bill

* Fading expectations of US rate hike by year-end hit dollar

* Bank of Japan seen dialing back its inflation target

* ECB likely to hold steady, could tweak language

TOKYO, July 19 (Reuters) - The dollar nursed losses on Wednesday after skidding to a 10-month low against a currency basket as Republican legislators' failure to pass a stalled healthcare bill raised fears for the rest of President Donald's Trump reform agenda.

Republican efforts to overhaul or repeal Obamacare collapsed in the U.S. Senate on Tuesday, rattling financial markets and casting doubt on the chances of getting Trump's economic plans, such as tax reform and stimulus, through a divided Congress.

The dollar index, which tracks the greenback against a basket of six major rivals, edged up 0.2 percent to 94.780 after falling as low as 94.476 on Tuesday, its lowest level since September 2016.

The euro inched 0.2 percent lower to $1.1534, after rising as high as $1.1583 on Tuesday, its highest since May 2016.

The European Central Bank will hold a policy meeting on Thursday, with participants seen likely to adjust their language as they edge the ECB towards normalizing policy.

Such adjustments may include dropping a reference to the bank's readiness to increase the size or duration of its asset-purchase program before announcing in the autumn how and when it will start winding down its bond-buying.

The ECB, keen to retain flexibility in case the outlook sours, is set to keep its asset purchases open-ended rather than setting a potentially distant date on which bond-buying will stop, three sources familiar with the discussion said.

ECB President Mario Draghi roiled markets last month when he opened the door to potential adjustments to the quantitative easing program.

"For the ECB, the market has shifted its expectations somewhat in recent weeks, especially following Draghi's comments which were taken to be more hawkish," said Mitul Kotecha, head of Asia macro strategy for Barclays in Singapore.

"To this extent, there's a lot already priced in, in terms of both the euro and expectations of ECB policy," he said. "The attention is on whether that is sustained in terms of what Draghi was saying, or whether we'll see some reassessment."

Expectations that the Federal Reserve will be more cautious about raising interest rates also weighed on the greenback.

Economic data on Tuesday showed U.S. import prices falling for a second straight month in June as the cost of petroleum products declined further, suggesting inflation pressures could remain weak for a while.

Fed Chair Janet Yellen signaled caution in congressional testimony last week, with disappointing U.S. inflation and retail sales data on Friday adding to evidence that the central bank has reason to take its time in tightening.

"The failure of the healthcare bill added the newest pressure to the dollar, but it was already under pressure after Yellen's comments last week," said Mitsuo Imaizumi, Tokyo-based chief foreign exchange strategist for Daiwa Securities.

The Fed chief referred to "uncertainty," he said, a word that "makes markets nervous," and prompted them to pare their expectations of another interest rate hike this year, he said.

The dollar was flat against its Japanese counterpart at 112.065 yen, well below its nearly four-month high of 114.495 touched last week. It fell as low as 111.685 on Tuesday, its lowest since June 27.

The Bank of Japan will also conclude a policy meeting on Thursday. Policymakers are expected to raise their economic growth forecasts but cut their rosy inflation outlook, sources say, reinforcing expectations it will lag well behind major global central banks in dialing back its massive stimulus program.

A majority of economists polled by Reuters expect the BOJ to delay again its projected timing for achieving the 2 percent inflation target.

The Australian dollar was up 0.2 percent to $0.7926 after surging to two-year highs on Tuesday as minutes of the last meeting of the country's central bank showed policymakers turned more upbeat on the economic outlook.

The dollar edged down 0.2 percent against the Mexican peso to 17.446 after credit ratings agency Standard & Poor's on Tuesday revised Mexico's sovereign credit outlook up to "stable" from "negative," and commended the government's efforts to rein in a surge in debt.

(Reporting by Lisa Twaronite; Editing by Kim Coghill and Eric Meijer)