By Karen Brettell
NEW YORK (Reuters) - The U.S. dollar pared its gains on Wednesday after minutes from the Federal Reserve's July meeting showed that Fed officials are concerned the U.S. central bank could raise rates too far as part of its commitment to get inflation under control.
In a glimpse of the emerging debate at the central bank, "many" participants noted a risk that the Fed "could tighten the stance of policy by more than necessary to restore price stability," a fact that they said made sensitivity to incoming data all the more important, the minutes showed.
"Some participants at the Fed were noting that interest rate sensitive sectors had begun to show signs of slowing and that there was in the eyes of some participants a risk of overtightening," said Brian Daingerfield, head of G10 FX strategy at NatWest Markets in Stamford, Connecticut.
It comes after Fed Chairman Jerome Powell said at the July meeting that the impact of Fed rate increases to date is still building in the economy, and depending on how inflation responds in coming months that could allow the central bank to begin to slow the pace of rate increases.
"That combination I think is giving the minutes a little bit of a dovish feel relative to what we’ve heard from FOMC officials in the aftermath of the meeting,” said Daingerfield.
The dollar index fell to 106.39 after the meeting minutes were released, before rebounding back to 106.55, up 0.09% on the day.
The size of the Fed’s next expected rate hike is expected to depend on consumer price inflation and jobs data for August, which will be released before its September meeting.
The odds of a 75 basis-point hike in September dropped to 40% after the meeting minutes, from 52% earlier on Wednesday, with a 50 basis-point hike now seen as a 60% probability.
Looser financial conditions as benchmark 10-year Treasury yields hold below 3% and as the credit and stock markets improve has also increased speculation the Fed may need to be more aggressive in hiking rates to make an impact.
Retail sales data on Wednesday were solid, helping to reduce concerns about an economic slowdown.
"Everyone is focused on - well, will we really see the Fed be in a position where they need to deliver more massive rate hikes and can the economy handle it, and right now the economy looks like it can," said Edward Moya, senior market analyst at OANDA in New York.
The euro gained 0.13% on the day against the dollar to $1.0185. The greenback gained 0.55% against the yen to 134.97.
The Australian dollar fell 1.23% as concerns about Chinese demand for commodities including iron ore dented the appeal of the currency.
The New Zealand dollar also dropped 0.98%, erasing earlier gains in volatile trading on what was likely profit-taking on the original move.
New Zealand's central bank on Wednesday delivered its seventh straight interest rate hike and signaled a more hawkish tightening path over coming months to rein in stubbornly high inflation, which briefly boosted the currency.
Sterling also faded after an initial jump on data showing that consumer price inflation in Britain rose to 10.1% in July, the highest level in 40 years.
The British pound was last down 0.34% on the day at $1.2059.
Currency bid prices at 3:15PM (1915 GMT)
Description RIC Last U.S. Close Pct Change YTD Pct High Bid Low Bid
Dollar index 106.5500 106.4800 +0.09% 11.381% +106.8900 +106.3000
Euro/Dollar $1.0185 $1.0172 +0.13% -10.41% +$1.0202 +$1.0146
Dollar/Yen 134.9650 134.2550 +0.55% +17.27% +135.4950 +133.9100
Euro/Yen 137.46 136.50 +0.70% +5.48% +137.8700 +136.2700
Dollar/Swiss 0.9514 0.9497 +0.19% +4.31% +0.9543 +0.9485
Sterling/Dollar $1.2059 $1.2098 -0.34% -10.85% +$1.2143 +$1.2028
Dollar/Canadian 1.2907 1.2846 +0.49% +2.09% +1.2936 +1.2828
Aussie/Dollar $0.6939 $0.7024 -1.23% -4.57% +$0.7026 +$0.6912
Euro/Swiss 0.9691 0.9656 +0.36% -6.54% +0.9700 +0.9652
Euro/Sterling 0.8444 0.8408 +0.43% +0.52% +0.8450 +0.8390
NZ $0.6283 $0.6343 -0.98% -8.23% +$0.6383 +$0.6260
Dollar/Norway 9.6945 9.6770 +0.17% +10.03% +9.7470 +9.6625
Euro/Norway 9.8798 9.8293 +0.51% -1.33% +9.9070 +9.8215
Dollar/Sweden 10.3824 10.3332 +0.61% +15.13% +10.4139 +10.3154
Euro/Sweden 10.5759 10.5117 +0.61% +3.34% +10.5914 +10.5050
(Additional reporting by Iain Withers in London; Editing by Mark Potter)