TOKYO, July 10 (Reuters) - The dollar was on the front foot on Wednesday, but hovered near a three-week low, as the cautious tone from Federal Reserve Chair Jerome Powell kept risk sentiment in check, while the New Zealand dollar weakened at the prospect of a rate cut there.
In the first day of his testimony to Congress overnight, Powell said a rate cut is not appropriate until the Fed gains "greater confidence" that inflation is headed toward the 2% target, setting the stage for Thursday's CPI report for June.
Powell, however, noted the cooling job market. "We now face two-sided risks" and can no longer focus solely on inflation, he said.
The dollar index, which measures the U.S. currency against six major peers including the euro and yen, was little changed at 105.09, after rising about 0.1% on Tuesday. It had dipped on Monday to the lowest since June 13 following unexpectedly soft U.S. payrolls data.
Traders now have around 73% odds for a rate cut by September, slipping from 76% a day earlier, CME FedWatch tool showed, with a second reduction mostly priced in by December.
"Powell was careful not to pre-commit to a path they could still readily be knocked away from by the data flow," said Taylor Nugent, senior markets economist at National Australia Bank.
"Even as markets look to September as the likely kick-off date, it is difficult for pricing to firm much further with three CPI prints and two payrolls to get through, which could readily delay things."
Following his testimony to the Senate, Powell is scheduled to speak before the House later in the day.
Meanwhile, the kiwi was 0.51% lower at $0.60940, pulling further away from Monday's three-week high of $0.6171 after the Reserve Bank of New Zealand opened the door to possible rate cuts should inflation slow as expected.
The RBNZ, which held rates steady as widely expected, expressed confidence that inflation would return to its target band this year, spurring bets for early policy easing.
At the previous meeting in May, policymakers had flagged the potential for an additional rate hike.
"There was a signal of greater confidence that inflation will return to target this year," said Kyle Rodda, senior financial market analyst at Capital.com.
"That's a revelation and sets the stage for a rate cut before the end of 2024. The markets were already implying it, but this dovish shift suggests it could come sooner than previously though."
The Australian dollar surged 0.5% against its neighbour to hit NZ$1.1065 for the first time since February 2023. The Aussie eased 0.1% to $0.67345, but was still hovering close to Monday's six-month peak of $0.67615.
The euro was steady at $1.0820, below the near one-month high of $1.0845 it touched on Monday as investors brace for a political deadlock in France in the wake of the shock election win for the country's leftist alliance.
The single currency came under pressure last month after the snap election was called but has since clawed back some of those losses, although investors remain wary of the possible policy impasse.
The dollar rose 0.07% to 161.43 yen as the currency pair traded in a tight range ahead of the Bank of Japan's meeting due at the end of the month.
Sources told Reuters that the BOJ will likely trim this year's economic growth forecast in July but project inflation will stay around its 2% target in the coming years, keeping alive the chance of an interest rate hike this month.
Markets are pricing in a nearly 60% chance of the BOJ raising rates by 10 bps in July.
(Reporting by Kevin Buckland; Additional reporting by Tom Westbrook and Ankur Banerjee; Editing by Sherry Jacob-Phillips and Jacqueline Wong)
