U.S. dollar gains vs. yen, euro with outlook seen positive still

By Gertrude Chavez-Dreyfuss

NEW YORK (Reuters) - The U.S. dollar firmed against the yen and euro on Tuesday, after several days of losses in the wake of President Donald Trump's inaugural speech promising more trade protectionism, with the U.S. economic outlook still seen as better than that of Europe or Japan.

"While there remains plenty of uncertainty surrounding the timing and impact of any new fiscal stimulus, we remain confident that monetary policy will continue to diverge as the Federal Reserve is likely to implement 2-3 rate hikes in 2017 while other major central banks remain in easing mode," said Jim Smigiel, head of global portfolio strategy at SEI Investments in Philadelphia.

That should support the broader trend of dollar strength, he added.

Juan Perez, currency trader at Tempus Consulting in Washington, however said there is plenty of unease in the market still. "The market is still on a roller-coaster."

He added that investors are particularly worried about Trump's plan to renegotiate the North American Free Trade Agreement with Mexico and Canada and his abandonment of the Trans-Pacific Trade Partnership with Asian countries.

Comments about the need for a weaker U.S. dollar from Trump and his pick for U.S. Treasury Secretary, Steven Mnuchin, were also a concern.

The dollar had soared over 6.0 percent to 14-year highs against a basket of major currencies (.DXY) in the eight weeks following Trump's surprise election victory in November.

Investors bet his promised infrastructure spending and tax cuts would boost economic growth and inflation, leading the Federal Reserve to raise interest rates faster.

After peaking in early January, that rally has stalled for now, with the dollar down 3.5 percent against a basket of major currencies (.DXY) in the past three weeks. The dollar index last traded up 0.2 percent at 100.35.

Against the yen, the dollar rose more than 1 percent to 113.87 yen .

"Interest rate differentials are providing modest dollar/yen support with the two-year U.S.-Japan yield spread pushing back toward 140 basis points," said Eric Theoret, currency strategist at Scotiabank in Toronto.

The euro, which had looked to be heading toward parity with the dollar at the end of 2016, has recovered above $1.07 and hit seven-week highs of $1.0774 in early Asian trading on Tuesday. By late New York trading though, the euro was down 0.4 percent at $1.0724.

Sterling, meanwhile, slipped 0.2 percent to $1.2503 after Britain's Supreme Court ruled that the government would need approval from Britain's parliament before formally triggering the country's departure from the European Union.

(Reporting by Gertrude Chavez-Dreyfuss; Editing by Clive McKeef and Andrea Ricci)