By Karen Brettell

NEW YORK (Reuters) – The dollar index gained on Friday after Federal Reserve Chair Jerome Powell adopted a hawkish tone to battling inflation, but did not settle the debate on how large a rate increase is likely at the U.S. central bank’s September meeting.

The U.S. economy will need tight monetary policy “for some time” before inflation is under control, which means slower growth, a weaker job market and “some pain” for households and businesses, Powell said on Friday in remarks that warned there is no quick cure for fast rising prices.

Powell gave no indication of how high interest rates might rise before the Fed is finished, only that they will move as high as needed as it seeks to bring down inflation to its 2% target.

“I think overall the Fed chairman was really hawkish, but not above and beyond what had been priced in and I think the jury is still out on whether or not we see a 50 or 75 basis point rate hike next month,” said Joe Manimbo, senior market analyst at Convera in Washington.

Jobs and inflation data for August that will be released before the Fed’s Sept. 20-21 meeting will now be key to the size of the Fed’s next rate increase, Manimbo added.

The dollar index was last at 108.56, up 0.09% on the day, after falling to 107.54 earlier on Friday. It is down from a five-week high of 109.27 on Tuesday and is holding below a 20-year high of 109.29 reached on July 14.

The euro rose 0.18% to $0.9989. It has bounced from a 20-year low of $0.99005 on Tuesday. The dollar also gained 0.58% against the Japanese yen to 137.27.

The dollar dipped earlier on Friday after data showed that U.S. consumer spending barely rose in July as a drop in gasoline prices weighed on receipts at service stations, and that monthly inflation slowed down considerably.

Other data on Friday showed that U.S. consumer sentiment improved further in August and households’ near-term inflation expectations fell to an eight-month low.

Atlanta Fed President Raphael Bostic said earlier on Friday that with data showing U.S. inflation is slowing, he is “leaning” toward supporting a 50 basis point rate hike in September on the way toward getting the policy rate to 3.5% to 3.75% by year end.

Fed funds futures traders are pricing in a 56% chance of a Fed rate hike of another 75 basis points at its September meeting, compared with 45% before Powell’s comments, and a 44% probability of a 50 basis points increase.

The euro also hit a session high against the greenback earlier on Friday after Reuters reported that some European Central Bank policymakers want to discuss a 75 basis points interest rate hike at the September policy meeting, even if recession risks loom, as the inflation outlook is deteriorating.

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Currency bid prices at 11:17AM (1517 GMT)

Description RIC Last U.S. Close Pct Change YTD Pct High Bid Low Bid

Previous Change

Session

Dollar index 108.5600 108.4800 +0.09% 13.482% +108.7500 +107.5400

Euro/Dollar $0.9989 $0.9972 +0.18% -12.13% +$1.0090 +$0.9947

Dollar/Yen 137.2700 136.4800 +0.58% +19.24% +137.3350 +136.1900

Euro/Yen 137.11 136.14 +0.71% +5.21% +137.9600 +136.1000

Dollar/Swiss 0.9649 0.9637 +0.09% +5.74% +0.9659 +0.9579

Sterling/Dollar $1.1756 $1.1838 -0.65% -13.04% +$1.1900 +$1.1761

Dollar/Canadian 1.3004 1.2924 +0.60% +2.84% +1.3004 +1.2905

Aussie/Dollar $0.6917 $0.6981 -0.90% -4.83% +$0.7009 +$0.6918

Euro/Swiss 0.9637 0.9608 +0.30% -7.06% +0.9673 +0.9601

Euro/Sterling 0.8494 0.8428 +0.78% +1.12% +0.8502 +0.8427

NZ $0.6159 $0.6226 -1.06% -10.00% +$0.6232 +$0.6160

Dollar/Dollar

Dollar/Norway 9.7250 9.6540 +0.67% +10.32% +9.7255 +9.5840

Euro/Norway 9.7168 9.6275 +0.93% -2.97% +9.7179 +9.6345

Dollar/Sweden 10.6328 10.5862 +0.63% +17.91% +10.6351 +10.4778

Euro/Sweden 10.6178 10.5513 +0.63% +3.75% +10.6235 +10.5500

(Editing by Chizu Nomiyama; editing by Jonathan Oatis)