By Rae Wee
SINGAPORE, Feb 20 (Reuters) - The dollar was poised on Friday to cap its strongest weekly performance since October, buoyed by a run of better-than-expected economic data, a more hawkish Federal Reserve outlook and as tensions between the U.S. and Iran kept markets on edge.
Currencies were mostly rangebound in the Asian session, though the Australian and New Zealand dollars fell in choppy trade with investors reluctant to take on risk ahead of the weekend, fearing a U.S. military build-up in the Middle East could signal an imminent conflict.
The U.S. dollar meanwhile clung to gains on Friday, after getting a lift from data in the previous session which showed the number of Americans filing new applications for unemployment benefits fell more than expected last week, underscoring labour market stability.
That left sterling languishing near a one-month low at $1.3447 and headed for a weekly drop of more than 1.5%.
The euro was similarly down 0.15% at $1.1752 and set to lose nearly 1% for the week, with the common currency also weighed down by uncertainty over European Central Bank President Christine Lagarde's tenure.
Against a basket of currencies, the dollar hovered near Thursday's one-month peak and steadied at 98.00. It was on track for a weekly gain of more than 1%, which would mark its strongest performance in more than four months.
"It wouldn't surprise me if the U.S. dollar keeps lifting for a while longer," said Joseph Capurso, a strategist at Commonwealth Bank of Australia, citing hawkishness from this week's Fed minutes which showed several policymakers were open to rate hikes if inflation proved sticky.
The geopolitical concerns have also lent the dollar some safe-haven support this week.
U.S. President Donald Trump warned Iran on Thursday it must make a deal over its nuclear programme or "really bad things" would happen, and set Tehran a deadline of 10 to 15 days to cooperate. Iran said it would retaliate against U.S. bases in the region if attacked.
"That could really affect oil markets and currency markets if things go bad there. It'll be a test also about whether or not the U.S. dollar is still a safe haven," said Capurso.
"A major attack would call that into question."
RATES, RATES, RATES
The Australian dollar was weighed down by the risk-off mood in markets and dropped 0.3% to $0.7038, though was set to lose less than 0.5% for the week, as it continues to be buoyed by hawkish rate expectations at home.
The New Zealand dollar was in a bit more of a bother, headed for a weekly fall of nearly 1.5%, undone by a dovish outlook on rates from the Reserve Bank of New Zealand. Investors wagering on tighter policy were badly wrongfooted, following a blizzard of cuts over the past year or so.
The kiwi last traded 0.4% lower at $0.5950.
Investors are now turning their attention to the release of the U.S. core PCE price index and advance fourth quarter GDP figures later in the day, which could drive the next move in currencies.
Investors continue to price in roughly two Fed rate cuts this year, though expectations for such a move in June have dipped to a roughly 58% chance from 62% a week ago, according to the CME FedWatch tool.
"The big argument within the Fed is whether or not to proactively lower rates to support the job market, or to keep rates higher for longer in order to fight inflation," said Chris Zaccarelli, chief investment officer for Northlight Asset Management, adding that Friday's PCE report will "add to the debate".
In Japan, the yen fell more than 0.2% and was last at 155.33 per dollar.
Data on Friday showed the country's annual core consumer inflation hit 2.0% in January, the slowest pace in two years.
"Today's data won't exactly instil a sense of urgency in the (Bank of Japan) to resume its tightening cycle, especially given the lacklustre rebound in activity last quarter," said Abhijit Surya, senior APAC economist at Capital Economics.
The currency hardly reacted to a speech from Japanese Prime Minister Sanae Takaichi on Friday, as she underlined her administration's commitment to revitalising the economy.
(Reporting by Rae Wee; Editing by Shri Navaratnam and Kate Mayberry)
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