Forex - Dollar comes off daily highs ahead of weekend

LONDON (Thomson Financial) - The dollar paused in its rally of the past few days as investors took profits ahead of the weekend, although further gains may come next week if the U.S. Federal Reserve suggests it is done cutting interest rates.The greenback has benefited from speculation that the Federal Reserve's expected rate cut next week may well be its last. With equity markets stabilised and a growing sense that the bulk of subprime-related writedowns have been revealed, the Fed may opt for more caution over inflation."Hawks like Richard Fisher and Charles Plosser have argued that the Fed will have to differentiate between a policy supporting liquidity conditions and its interest rate policy designed to steer the output gap in order to keep inflation near desired levels," said Hans Redeker, head of forex strategy at BNP Paribas.The Fed is widely expected to cut rates by another 25 or 50 basis points next week, and the focus will be on whether rate-setters feel the need to pause after that or stop cutting rates altogether.The softening in the dollar from its highs in the morning was also triggered by a downward revision in the University of Michigan consumer confidence indicator.It was revised down to 62.6 in April from the preliminary reading of 63.2 and 69.5 in March. The data is at a 26-year low and also revealed that nine in 10 consumers believe the U.S. economy is in a recession.However, the one-year inflation expectations rose to 4.8 percent in April from 4.3 percent in March."The Fed watches consumer inflation expectation closely. This report shows enough evidence for the fed to end rate cuts," said Myra DSouza at IFR Markets.The euro was still broadly weaker, particularly against the pound, as softer economic data from the euro zone -- with the German Ifo indicator posting a surprise fall on Thursday and M3 money supply easing beyond expectations Friday -- has cast doubt on the ability of the region to 'de-couple' from the U.S. recession and global financial crisis.In the United Kingdom, the pound was stronger after GDP in the morning morning came roughly in line with expectations. First-quarter growth was 0.4 percent, a three-year low and down significantly from the 0.6 percent in the previous quarter, but still not as bad as some investors were fearing.This pushed traders to buy back into the pound on the view that the Bank of England is unlikely to cut interest rates next month.This view was reinforced later by a YouGov/Citigroup survey that showed inflation expectations have continued to rise, to 3.8 percent in April, up sharply from 3.6 percent in March and 3.1 percent in February."The further rise in inflation expectations in April is a blow to hopes that the Bank of England will trim interest rates by a further 25 basis points as soon as May," said Howard Archer at Global Insight.London 1440 GMT London 1115 GMT U.S. dollar yen 104.30 down from yen 104.42Swiss franc 1.0343 down from Swiss franc 1.0390EuroU.S. dollar 1.5627 up from U.S. dollar 1.5586yen 162.99 up from yen 162.74Swiss franc 1.6164 down from Swiss franc 1.6194pound 0.7871 up from pound 0.7859PoundU.S. dollar 1.9853 up from U.S. dollar 1.9831yen 207.07 unchanged yen 207.07Swiss franc 2.0536 down from Swiss franc 2.0604Australian dollar U.S. dollar 0.9321 down from U.S. dollar 0.9333pound 0.4695 down from pound 0.4706yen 97.17 down from yen 97.40carlo.piovano@thomsonreuters.comcp/cp/kf1
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