* Dollar bulls concerned about steep U.S. Treasury yield falls
* Loonie hits 1-1/2-yr low after Bank of Canada meeting
* Euro, yen's boost from previous session fades
* Investors eye U.S. November jobs data for trading cues
* Graphic: World FX rates in 2018
By Daniel Leussink
TOKYO, Dec 7 (Reuters) - The dollar struggled to recover in Asian
trade on Friday, hobbled by fresh speculation that a widely expected
rate hike later this month could be the last before Federal Reserve
hits the pause button on its tightening cycle.
Investors have been alarmed by recent sharp falls in U.S. treasury
yields, with an inversion of the yield curve signalling a sharp
economic slowdown or even a recession down the road.
Their immediate focus was on November U.S. non-farm payrolls,
unemployment and wage data due to be released later on Friday for
clues to how the world's top economy is faring.
"Arguably, one of the strongest parts of the U.S. economy has
been the labour market," said Chris Weston, Melbourne-based head
of research at foreign exchange brokerage Pepperstone. "If we see
any cracks appearing in there, the U.S. dollar will start to fade off."
Dollar investors were given more reason to be cautious after the
Wall Street Journal reported Fed officials are considering whether to
strike a wait-and-see attitude after a likely rate increase at their
meeting in December.
The dollar index , which measures the greenback against a basket
of six major peers, was virtually flat at 96.802. The index shed 0.3
percent during the previous session, closing at one-week low and down
0.9 percent from a 17-month peak hit on Nov. 12.
The benchmark U.S. 10-year Treasury yield was last at 2.896
percent after dipping overnight to its lowest level since late August.
The dollar has slipped after Fed Chairman Jerome Powell said last
week that U.S. interest rates were nearing neutral levels, which
markets interpreted as signalling a slowdown in rate hikes.
If the Fed raises interest rates as expected at its Dec. 18-19
meeting, it would be the fourth hike this year, and investors are
focussed on how much further the tightening cycle has to run.
"The guidance going forward will be key to yields and equity
market moves, which right now foreign exchange markets seem to be
reacting to," said Bart Wakabayashi, Tokyo branch manager at
State Street Bank.
Interest rate futures implied traders see no more than one rate
increase from the Fed in 2019, compared with previous expectations for
possibly two rate hikes, according to CME Group's FedWatch programme.
On Friday, the dollar was steady against the euro at $1.1378.
Against the Japanese yen , it tacked on 0.1 percent to 112.79 yen.
The single currency had gained 0.3 percent against the dollar
during the previous session while the yen rose about a quarter of a percent.
The Canadian dollar sat at C$1.3388, basically unchanged from
Thursday's close. The loonie had hit a 1-1/2-year low of C$1.3445
against the greenback overnight after the Bank of Canada suggested the
pace of future rate hikes could be more gradual.
The Australian dollar was flat at $0.7236, not far off a
three-week trough of $0.7192 hit on Thursday.
The greenback has been pressured this week by an inversion in part
of the U.S. yield curve seen as an early warning sign for a potential
The spread between the two-year and five-year U.S. Treasury yields
inverted this week and the two-year/10-year spread was at its tightest
in more than a decade amid a sharp fall in long-term rates.
Historically, the economy has taken anywhere between 12 months and
24 months to fall into a recession when the yield curve inverts.
Some market participants believe the dollar index may have peaked
out, State Street's Wakabayashi said.
Financial institutions and companies usually take extra efforts to
fund their operations over the year-end, which often leads to
increased demand for the dollar as its the world's most liquid
currency, but Wakabayashi believed it was less pronounced this year.
"The dollar funding over the calendar year-end hasn't really
been as aggressive as we've seen in the past few years," he said.
"If the natural demand does not seem to be appearing in the
market, then I think the people who are holding on to those dollars
may look to unwind some of those trades."
(Reporting by Daniel Leussink Editing by Simon Cameron-Moore)
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