May 13, 2020 / 10:42 AM / 19 days ago

FOREX-Dollar drifts as Fed's Powell seen wading into negative rates debate

* Graphic: World FX rates in 2019 tmsnrt.rs/2egbfVh (Adds quotes, background, graphic)

By Saikat Chatterjee and Julien Ponthus

LONDON, May 13 (Reuters) - The dollar steadied below a three-week high on Wednesday as investors waited for a speech from Federal Reserve Chairman Jerome Powell after U.S. President Donald Trump called for the introduction of negative interest rates.

Although some U.S. policymakers have spoken against negative interest rates, two-year U.S. Treasury yields fell to a record low of 0.105% last week and 2021 Fed fund futures contracts are skirting negative territory.

Trump on Tuesday called for his country 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 the throes of a recession, fuelling the debate over the policy response.

"The central banker might use the opportunity to nip the negative rates chatter in the bud," wrote CMC Markets analyst David Madden, with many investors expecting a rebound in the dollar should Powell decide to do so.

Against a basket of rivals, the dollar index was flat at 100.02, hovering below the three-week high of 100.44 hit on Tuesday. The greenback has gained more than 5% from an early March low of 94.63.

"If push comes to shove, the Fed would of course consider negative interest rates, too, but they are likely to be on the bottom of the Fed’s list of possible options when it comes to supporting the financial system or the economy further," said Commerzbank strategist Antje Praefcke.

The euro edged down 0.1% to $1.0840 against the dollar after euro zone industrial production suffered its steepest monthly fall on record in March as coronavirus containment measures hit activity severely.

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.

Powell is due to speak on a webcast hosted by the Peterson Institute for International Economics at 9 a.m. (1300 GMT).

Until now, Fed officials have said they do not see a need to cut interest rates below zero and some market players expect Powell to stick to that script.

"But what's worrying is that Trump is now talking about them. Looking at past examples, the Fed has eventually done what Trump wanted quite often," said Hiroyuki Ueno, senior strategist at Sumitomo Mitsui Trust Asset Management.

Elsewhere, the British pound trimmed earlier gains to $1.2273 as bond yields fell after data showed the economy contracted by a record 5.8% in March even though household consumption dropped less than feared by some market participants.

Sweden's krona was flat against the euro and fell 0.2% against the dollar after inflation slid to its lowest pace in at least 30 years in April, below analyst forecasts.

The New Zealand dollar slumped 0.9% to $0.6018 against the U.S. dollar after the central bank expanded asset purchase to NZ$60 billion from NZ$33 billion while its policy minutes said that negative interest rates were a future option.

Reporting by Saikat Chatterjee and Julien Ponthus; Additional reporting by Hideyuki Sano in Tokyo; Editing by David Goodman and Alison Williams

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