May 13, 2020 / 3:22 PM / 15 days ago

FOREX-Dollar erases losses after Powell sounds cautious on growth

* Fed's Powell warns of prolonged economic weakness

* Fed will not push rates below zero, Powell says (New throughout, updates prices, market activity and comments to U.S. market open; new byline, changes dateline, previous LONDON)

By Saqib Iqbal Ahmed

NEW YORK, May 13 (Reuters) - The U.S. dollar erased losses to trade flat 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 little changed on the day at 100.02. The index slipped as low as 99.57 during 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.

"Powell clearly shelved the prospect of negative rates for now," Karl Schamotta, chief market strategist at Cambridge Global Payments in Toronto.

"Market participants will look for enhanced forward guidance and more explicit forms of yield curve control at the June meeting," Schamotta said.

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 signaled 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 during a 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.

Elsewhere, the British pound gave up earlier gains to trade 0.2% lower on the day 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.

The New Zealand dollar slid 1.0% 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

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