Dollar holds near 16-month low; U.S. rate policy in focus

TOKYO Wed Apr 13, 2011 7:55pm EDT

Japanese yen notes are piled up after counting at a bank during a photo opportunity in Seoul October 8, 2010. REUTERS/Lee Jae-Won

Japanese yen notes are piled up after counting at a bank during a photo opportunity in Seoul October 8, 2010.

Credit: Reuters/Lee Jae-Won

TOKYO (Reuters) - The dollar held near the previous day's 16-month low against a basket of currencies on Thursday as mixed U.S. data did nothing to change the view that the Federal Reserve would stick to its super-easy monetary policy.

Wednesday's data showed U.S. retail sales posted their smallest gain in nine months in March, while a Federal Reserve report said the economy was improving but firms are feeling the effects of higher energy prices.

This did nothing to change the view that the central bank would keep its $600 billion asset buying program until June, especially after President Barack Obama set out targets to cut the U.S. deficit through spending cuts and tax increases.

The dollar has been under pressure as expectations the European Central Bank will follow up its April interest rate hike with more tightening are widening rate differentials in favor of the euro, with rising oil prices boosting speculation oil producers will diversify reserves out of dollars.

"U.S. data overall was reasonable but the (Fed report) suggested uncertainty is rising. They did not offer big clues. The fact that the U.S. recovery is continuing will not become a trigger point for the Fed's policy," said Masafumi Yamamoto, chief FX strategist at Barclays Capital.

"Unemployment, although improving, is still relatively high and the Fed is not going to bring forward the end of its loose monetary policy. The dollar is finding no fresh factors to rise on."

The euro was trading at $1.4442, below its 15-month high of $1.4521. Mizuho Corporate Bank said the single currency is testing a long-term channel resistance just ahead of pivotal resistance at $1.4500. It said the Deutschmark never managed to hold above its equivalent to this level since exchange rates were floated.

The dollar index, which measures its strength against major currencies, was trading at 74.938 .DXY, just above its 16-month low of 74.704 set on Wednesday. The index has lost just over 5 percent since January.

Goldman Sachs said its models suggested the dollar is now about 13 percent cheaper than its fair value on a trade-weighted basis. However, only four out of 32 currencies of U.S. trading partners weakened against the dollar this year, which Goldman said would offer comfort to policymakers.

The dollar stood at 83.80 yen, off its 6- month high around 85.55 set last week, finding support at its 200-day moving average at around 83.43.

The area around 85.40/85.95 represents a 50 percent retracement of the decline from its May peak, the September highs and the critical downtrendline from the 2007 cycle high.

Expectations that the Fed will keep its monetary policy easy are likely to underpin the yen against the dollar.

"Lower expectations of Fed tightening will reduce the incentives for investors to seek alternative funding currencies such as the yen; similarly Japanese portfolio managers will be under less pressure to reduce currency hedges," BNP Paribas said in a note to clients.

"Thus while the rationale for a weaker yen remains, that weakness may not be expressed against the equally anemic dollar."

The euro held near 121 yen, also off its 11-month high around 123.30 set earlier this week.

Some people say the euro struggled to make fresh gains after Germany acknowledged for the first time Greece may restructure its debt.

(Editing by Joseph Radford)

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