By Richard Leong
NEW YORK (Reuters) - The dollar softened against most major currencies on Wednesday in step with lower U.S. bond yields and expectations the Federal Reserve would lower interest rates, reversing some of the prior day's gains tied to stronger-than-forecast retail sales data.
The pound fell to 27-month lows versus the greenback on jitters about a no-deal Brexit before rebounding in U.S. trading.
"With the market pricing for lower interest rates, that's keeping a lid on the dollar," said Chris Gaffney, president of world markets at TIAA Bank in St. Louis.
The greenback was also bogged down by uncertainties whether the White House would embark on efforts to weaken the dollar in the wake of comments from U.S. President Donald Trump who said on Twitter on July 3 the United States "should match" the "big currency manipulation game" by China and Europe.
"Anytime you have the president commenting on the need for a weaker dollar, that would pressure the dollar lower," Gaffney said.
Moreover, the International Monetary Fund on Wednesday said the greenback was overvalued by 6% to 12%, based on near-term economic fundamentals, while the euro, Japan's yen and China's yuan were seen as broadly in line with fundamentals.
The euro hit a one-week low against the dollar and toward the lower end of this year's trading range, weighed down by expectations of easing from the European Central Bank and investors' preference for the higher-yielding U.S. currency.
An index that tracks the dollar against the euro, yen, pound and three other currencies <.DXY> was down 0.20% at 97.204 after touching a one-week high.
Benchmark U.S. 10-year yields
The greenback has strengthened since late June in response to better-than-expected data on U.S. jobs, inflation and retail sales. Its rise has been limited by stronger signals from Federal Reserve officials of a possible rate decrease perhaps in two weeks to counter the risk from global trade tensions and sluggish price growth at home.
The Fed's latest Beige Book on Wednesday showed the longest U.S. economic expansion remained intact amid risk from trade disputes.
U.S. interest rates futures implied traders fully expect the Fed to cut rates at its upcoming policy meeting on July 30-31 with a 35% chance for a half-point decrease, CME Group's FedWatch tool showed.
(GRAPHIC - Bets on bold first rate-cut from the Fed: https://tmsnrt.rs/2XTkkpn)
(Additional reporting by Olga Cotaga in LONDON; Editing by Nick Zieminski and Chizu Nomiyama)