* Fed's Powell warns of prolonged economic weakness
* Sterling falls to 5-week low as dollar strengthens (Updates to U.S. afternoon)
By Saqib Iqbal Ahmed
NEW YORK, May 13 (Reuters) - The U.S. dollar edged higher against a basket of currencies on Wednesday, after Federal Reserve Chair Jerome Powell rejected the idea of using negative interest rates as a stimulative tool, even as he sounded a gloomy note about economic growth.
In remarks webcast by the Peterson Institute for International Economics, Powell said the country could face an "extended period" of weak growth.
Economic recovery may take time, depending on progress fighting the coronavirus pandemic, he said.
The U.S. Dollar Currency Index, which measures the greenback’s strength against six major currencies, was up 0.23% on the day at 100.26. The index fell as low as 99.57 earlier in the session.
Powell said the Fed's view on negative interest rates has not changed and it is not something policy makers are looking at.
"Mr. Powell’s resolute downplaying of negative rates will be music to the ears of dollar bulls who may use today’s event to bid the greenback higher," said Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington.
Traders of short-term U.S. interest-rate futures reduced bets the Fed will take the unprecedented step of pushing interest rates below zero. Yet futures contracts maturing in April 2021 and later still signalled expectations for negative rates, according to CME Group's FedWatch tool.
U.S. President Donald Trump on Tuesday called for the U.S. to "accept the gift" of negative rates - as data showed that U.S. consumer prices dropped 0.8% in April, the largest decline since December 2008, when the economy was in recession.
The dollar index has traded in a tight range over the past few weeks but remains just 3% shy of a more than three-year high hit in late March, supported by heightened demand for safe havens as financial markets remain on edge about the economic impact of the pandemic.
While the dollar has benefited from safe-haven flows amid the market turmoil, the outlook remains divided, with hedge funds holding their short bets on the currency while institutional investors remain bullish.
The stronger dollar sent the British pound to its lowest in five weeks. The pound was last down 0.37% against the greenback. The New Zealand dollar slid 1.6% after the country's central bank doubled the amount of bonds it was buying and opened the door to negative interest rates, sending long-term bond yields to all-time lows.
Reporting by Saqib Iqbal Ahmed; Editing by David Gregorio and Andrea Ricci