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Wed 22 Jun 2016 11:56 AM

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Dollar takes the lead as sterling stalls ahead of Brexit vote

Federal Reserve Chair Janet Yellen expressed general optimism about the US economy

Dollar takes the lead as sterling stalls ahead of Brexit vote

The dollar clung onto modest gains early on Wednesday after Federal Reserve Chair Janet Yellen held the line of "gradual increases" in US rates, while sterling's short-covering rally lost momentum a day ahead of Britain's EU referendum.

The greenback briefly popped back above 105.00 yen JPY= for the first time in nearly a week and last stood at 104.79. The euro dipped to $1.1255 EUR=, peeling away from a two-week peak of $1.1383 set on Monday.

In testimony before Congress, Yellen expressed general optimism about the US economy and said gradual hikes in the federal funds rate were likely to be needed. However, she stressed the economic outlook was uncertain and that monetary policy was "by no means on a preset course".

"At the margin Yellen appeared to be a bit more cautious than before, but overall our assessment of the Fed remains unchanged," said Rodrigo Catril, currency strategist at National Australia Bank.

"We still expect two Fed hikes this year, albeit with clear risk we get no more than one."

The dollar index .DXY was back above 94.000, rebounding from a two-week trough of 93.425.

Yellen also highlighted the risks of Brexit, noting it could have "significant economic repercussions". In a similarly guarded tone, European Central Bank (ECB) President Mario Draghi said the ECB stood ready to act with all instruments if necessary.

Draghi's comments came as Swiss investment bank UBS warned its clients it may fail to execute some orders on its electronic trading platform should the referendum affect liquidity or cause extreme volatility.

With the June 23 vote looming large, a short-covering rally in sterling came to an abrupt halt, knocking the currency back to $1.4660 GBP=D4, from a near six-month high of $1.4788.

Commodity currencies also took a step back with the Australian dollar easing to $0.7456 AUD=D4, turning around from a seven-week high of $0.7513.

Recent opinion polls have mostly shown a shift toward keeping Britain in the European Union, but there are some signs that momentum has stalled for the 'In' camp and the race still looks too close to call.

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