March 2, 2018 / 12:52 AM / 20 days ago

FOREX-Dollar sags after Trump's tariff decision takes wind out of recovery

* Dollar index pulled back from 6-week highs

* Trump’s steel & aluminium tariff plan stops dollar’s recovery

* Euro awaits weekend Italy elections for near-term cues

* Pound edges off 7-week lows, focus on May’s speech

By Shinichi Saoshiro

TOKYO, March 2 (Reuters) - The dollar drooped on Friday, having pulled sharply back from six-week highs after U.S. President Donald Trump’s decision to impose tariffs on steel and aluminium took the wind out of the greenback’s week-long recovery.

The dollar index against a basket of six major currencies stood little changed at 90.264.

The index had shed 0.4 percent overnight, peeled away from a high of 90.932 - its strongest since Jan. 19 - after Trump announced on Thursday he would impose tariffs on imported steel and aluminium.

The Trump administration said the tariffs would protect U.S. industry, but the dollar and Wall Street shares slumped as the plan sparked fears of an imminent trade war.

Prior to Trump’s announcement, the dollar had enjoyed a rebound from three-year lows plumbed mid-February as hawkish-sounding comments by new Federal Reserve Chair Jerome Powell sharpened expectations towards the central bank raising rates as much as four times this year.

The dollar had sank to the three-year low last month, partly on fears of U.S. protectionism, and such worries were revived just as the currency looked set to shake off weakness suffered through much of February.

“The dollar appeared oversold in February, with the number of currency bears having increased beyond excess. Prior to Trump’s tariff talk some of that excess was being corrected, but his announcement took the dollar back to square one,” said Yukio Ishizuki, senior currency strategist at Daiwa Securities in Tokyo.

The greenback was 0.1 percent lower at 106.170 yen, having slid for the past two sessions against the Japanese currency, which tends to gain in times of risk aversion and equity market weakness. The dollar fell to as low as 106.080 yen, its weakest since Feb. 16.

The euro was little changed at $1.2271 after rising 0.6 percent overnight.

The common currency was still poised for a loss of about 0.25 percent this week, during which it slid to a seven-week low of $1.2154 on Thursday when the dollar was still enjoying an earlier broad bounce.

Focus for the euro was on the Italian parliamentary election scheduled on Sunday and how much support populist agendas could garner due to its potential impact on the European Union.

Leading political parties in Germany also decide on a coalition deal on Sunday that would secure Angela Merkel a fourth term as chancellor.

The pound was effectively flat at $1.3770 after bouncing overnight from a near two-month low of $1.3712.

British Prime Minister Theresa May will lay out her views on how to keep trade open between all of the United Kingdom and the European Union in a key speech on Friday.

May is due to speak just two days after the EU’s chief negotiator Michel Barnier struck a downbeat tone on the progress of Brexit talks so far, weakening sterling.

The Australian and New Zealand dollars were 0.1 percent higher at $0.7762 and $0.7258. (Reporting by Shinichi Saoshiro; Editing by Sam Holmes)

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