Dollar rally fizzles as market speculates over Trump's Fed choice

The dollar stepped back from a 1 1/2-month high against a basket of currencies on Wednesday, as the rally triggered by strong U.S. data fizzled on speculation U.S. President Donald Trump’s choice for the next Fed Chair may be a less hawkish candidate than previously thought.

The dollar was capped after Politico reported that U.S. Treasury Secretary Steven Mnuchin favors Fed governor Jerome Powell over former governor Kevin Warsh.

While both are seen as serious candidates to replace current Chair Janet Yellen when her term expires in February next year, Powell is seen as more dovish than Warsh, who has criticized the Fed’s bond-buying program in the past.

The dollar had rallied earlier this week on speculation Warsh may be the leading candidate to replace Yellen.

The dollar index stood at 93.57, off a 1 1/2-month high 93.92 touched on Tuesday following strong U.S. manufacturing figures.

“The dollar has gained recently on expectations of a Fed rate hike in December and hopes of tax cuts, but the markets have finished pricing in all the positive news,” said Shinichiro Kadota, senior rates and FX strategist at Barclays.

“A December rate hike is already factored in while we have to see whether any tax deal will come through,” he added.

Dollar money market futures were pricing in about 70 percent chance of a rate hike by December.

The euro EUR= traded at $1.1766, up 0.2 percent on the day and off Tuesday's 1 1/2-month low of $1.16955.

The common currency has been also dogged by concerns over political and social turmoil in Catalonia.

Spain’s King Felipe VI on Tuesday accused Catalan secessionist leaders of shattering democratic principles and dividing Catalan society while Catalonia’s leader, Carles Puigdemont, said the region will declare independence in a matter of days.

The dollar's rally against the yen has also stalled, with the U.S. currency unable to clear resistance around 113.25 yen in the past week. The dollar dipped 0.2 percent to 112.65 yen JPY=.

Uncertainties ahead of Japan’s general election on Oct. 22, where Prime Minister Shinzo Abe faces a challenge from a new party formed by a popular Tokyo Governor Yuriko Koike, also clouded the outlook for the currency pair.

The British pound dropped to $1.3222 GBP=D4 on Tuesday, its lowest in almost three weeks after data showing a surprise contraction in the construction sector stoked worries about economic uncertainty surrounding Britain's exit from the European Union.

Also adding to a sense of uncertainty, Brexit minister David Davis said on Tuesday that Britain is ready to walk away with no deal, and that officials were “contingency planning” to make sure all scenarios were covered.

The currency stood at $1.3259, down 1.0 percent so far this week.

The Australian dollar bounced back a tad after hitting a three-month low on Tuesday after the central bank cautioned that a higher currency would drag on the economy and inflation.

The Aussie fetched $0.7850 AUD=D4, up 0.2 percent on the day and off Tuesday's low of $0.7785.