Dollar slips as dovish Fed speak dials down rate expectations

By Tom Westbrook

SINGAPORE (Reuters) - The dollar softened on Tuesday along with U.S. interest rate expectations and a fall in Treasury yields as investors detected a slight dovish shift in Federal Reserve officials' tone.

The yen held small gains as violence in the Middle East supported buying of safe-haven assets, and last traded firmly at 148.34 per dollar. The Swiss franc has also gained and was edging higher at 0.9045 to the dollar.

The euro was up 0.1% in early Asia trade to $1.0580. The Israeli shekel steadied at 3.95 to the dollar, just off an almost eight-year low, after the central bank promised $30 billion in foreign exchange selling.

Investors are bracing for a drawn-out conflict after a weekend attack from Palestinian militants - and Israel's retaliation - has claimed more than 1,500 lives.

However comments from two Fed officials turned around the mood and U.S. rate forecasts overnight after noting the recent selloff in bonds might negate the need for further hikes.

"If long-term interest rates remain elevated because of higher term premiums, there may be less need to raise the Fed funds rate," said Dallas Fed president Lorie Logan -- a notable shift from previously hawkish rhetoric.

Fed Vice Chair Philip Jefferson said the central bank would need to "proceed carefully" given the recent rise in yields. Futures-implied pricing for the chance of another Fed hike this year fell from above 40% last week to about 26% on Monday.

"A handful of other officials, including Fed Governor Christopher Waller, are scheduled to speak today.  Markets will closely watch their comments for further clues on the path of (Fed) policy," said CBA strategist Carol Kong in a note.

Ten-year Treasury yields, which have been zooming, dived more than 13 basis points to 4.63% at the open in Tokyo on Tuesday on both rates relief and a safe-haven bet after the cash market had shut for Columbus Day on Monday. [US/]

China's return from a week's break has traders' eyes back focused on the daily fix of the yuan's trading band, which has for weeks on end been far firmer than market expectations.

Ahead of the onshore open, the yuan held overnight gains to trade just above its 50-day moving average in the offshore market at 7.2876 per dollar. [CNY/]