By Karen Brettell

NEW YORK (Reuters) -The dollar fell to a seven-month low and the Japanese yen hit a more than one-week high as traders awaited comments from Federal Reserve Chair Jerome Powell this week that are expected to signal the U.S. central bank will start cutting interest rates in September.

A key focus on Powell’s speech at Jackson Hole on Friday will be whether he indicates the Fed is likely to cut rates by 25 or 50 basis points. Odds of a larger cut have declined since data last week showed hotter-than-expected shelter inflation for July and also a strong retail sales report for the month.

Another main focus will be whether Powell indicates rate cuts are likely at each meeting going forward. But markets may be overestimating how far and fast the Fed is likely to act.

“I think we’re still at the point of the justification to cut in September,” said Eugene Epstein, head of structuring for North America at Moneycorp in New Jersey.

“On a relative basis it would be kind of over the top to be one of the last central banks to start their cutting cycle, but then also to start cutting immediately and cut 50 basis points and then cut every meeting after that,” Epstein said.

Powell may also be reluctant to commit to any details this week with inflation and jobs data for August still due before the Fed's September meeting.

Traders are pricing in a 23% chance of a 50-basis-point cut, down from 50% a week ago, with a 25-basis-point reduction having odds of 77%, according to the CME Group’s FedWatch Tool. Around 210 basis points of rate reductions are expected by the end of 2025.

In early August traders aggressively priced for imminent rate cuts after an unexpected increase in the unemployment rate in July raised concerns about a possible recession.

A large unwind of popular dollar/yen carry trades, in which traders borrowed the low interest rate yen and bought higher yielding U.S. assets, also roiled the stock market and led to a sharp repricing of rate expectations.

Now, “it seems like the market's starting to correct itself a little bit more in the right direction,” said Epstein.

Minneapolis Fed President Neel Kashkari said it was appropriate to discuss potentially cutting U.S. rates in September because of the rising possibility of a weakening labor market, the Wall Street Journal reported on Monday.

San Francisco Federal Reserve Bank President Mary Daly said it is time to consider adjusting borrowing costs from their current range of 5.25% to 5.5%, speaking in an interview with the Financial Times published on Sunday.