By Gregor Stuart Hunter and Johann M Cherian
July 30 (Reuters) - The dollar found its footing on Thursday after the Federal Reserve kept its policy interest rate on hold and Chair Kevin Warsh left markets guessing about how divisions on its rate-setting committee would resolve.
The greenback rose against most major currencies after the U.S. said it was conducting air strikes in Iran, which generated appetite for safe havens among investors.
The euro weakened 0.1% to $1.1458, and the yen traded around
163.5 to the dollar, a touch weaker on the day.
The pound was steady at $1.337, having dipped as much as 0.3% earlier, ahead of a Bank of England interest rate decision at 1100 GMT, with market participants expecting no change. The currency was up against the euro, which fell 0.2% to 85.69 pence.
The dollar index, which measures the greenback's strength against six other currencies, edged 0.1% higher to 100.93. It hit a one-week low immediately after the Fed decision to keep rates steady, which investors initially viewed as dovish.
"Warsh's comments at the press conference also did not suggest the Fed is in a rush to hike, and he referred to a 'period of watchful thinking,'" a group of analysts led by Mark Haefele at UBS wrote in a note.
"The market interpreted the FOMC statement and Warsh's comments dovishly," the UBS analysts said.
Treasury bonds reacted violently to the Fed decision, with the 30-year yield climbing above 5.2% to its highest in almost two decades, while 5-year Treasury Inflation-Protected Securities (TIPS), which gain in price when inflation expectations rise, struggled after a rally the day before took yields down about 7 bps.
The focus will now be on the Personal Consumption Expenditures Index due at 1230 GMT. Economists expect the index to show price pressures rose by 3.7% on an annual basis in June, down from 4.1% the month before, as energy costs moderated during the brief détente between Iran and the U.S.
Traders are ramping up their expectations for the Fed to leave interest rates unchanged again in September, with the probability for a hold now standing at 30%, compared with a 24% chance seen before the latest meeting, the CME Group's FedWatch tool showed.
"The outlook ahead though is now less clear, with greater uncertainty over the reaction function of the Federal Reserve. That's not a positive development for the dollar and risks are skewed toward further curve steepening that tends to coincide with dollar depreciation," said Derek Halpenny, head of research at MUFG, referring to a faster rise in longer-dated bond yields than those on shorter-dated maturities.
However, Halpenny said the inflationary impact from oil prices staying close to $90 a barrel could support the dollar, as some investors hold on to rate hike expectations.
The focus will later shift to the Bank of Japan's interest rate verdict on Friday as traders mull the possible rhetoric from policymakers that could pull the yen above this month's 40-year lows.
Economists anticipate Japanese interest rates will stay at 1%. However, recent reports show that central bankers are considering a faster pace of interest rate hikes, as the economy reels from inflation pressures as the Gulf conflict rages on.
The Australian dollar was up 0.2% at $0.6971, while its New Zealand counterpart was 0.6% firmer at $0.5828.
In cryptocurrencies, bitcoin was up 1.5% at $64,412, while ether was 1.8% higher at $1,917.
(Reporting by Gregor Stuart Hunter and Johann M Cherian; Editing by Christopher Cushing, Jamie Freed, Amanda Cooper and Anil D'Silva)
