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 =USD , 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 NZD= 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.

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Graphic: CFTC Dollar positions https://tmsnrt.rs/3fJQyx1
Graphic: World FX rates in 2019 http://tmsnrt.rs/2egbfVh
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