FOREX-Dollar near 10-mo high as Fed asset buying debate in focus

Fri May 17, 2013 4:16am EDT

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By Anirban Nag

LONDON, May 17 (Reuters) - The dollar rose against a basket of currencies on Friday, hovering near a 10-month high as debate over whether the Federal Reserve would wind down its asset buying programme later this year gathered pace.

The dollar's strength, along with expectations that the European Central Bank could introduce negative deposit rates, the rate at which banks park surplus funds with it, kept the euro pinned down to recent six-week lows.

The dollar index, which measures its value against a basket of six major currencies, rose 0.4 percent to 83.886, nearing a 10-month high of 84.094 set on Wednesday. A break of its July peak of 84.10 would see it rise to its highest in nearly three years.

The dollar was up 0.2 percent at 102.51 yen, not far from Wednesday's 4-1/2-year high of 102.77 yen.

Investors added to favourable bets in the dollar, drawing support from comments by a regional Federal Reserve chief who said the Fed could begin easing up on stimulus this summer.

John Williams, the president of the San Francisco Fed, said the U.S. central bank could completely exit its easing by the end of the year.

Although Williams is not a voter this year at the Federal Open Market Committee, his views carry weight as they are often considered close to Fed's top officials such as Chairman Ben Bernanke and Vice Chair Janet Yellen.

Bernanke and Yellen want to keep monetary policy ultra-loose for a longer period of time, while others like Richmond Fed chief Jeffrey Lacker say the economy's prospects are looking better and the pace of asset purchases can be reduced.

"His comments took the market by surprise since he is a dove," said Peter Kinsella, currency strategist at Commerzbank.

"It is a dollar story this year as the U.S. labour and housing markets appear to be recovering. And while we do expect the Fed to be cautious in withdrawing stimulus, the economic recovery should drive the dollar higher."

A resurgent dollar pushed the euro near a six-week low. The common currency stood at $1.2870, not far from a six-week low of $1.2843 hit on Wednesday, with buying by Middle-East investors slowing its decline.

"We have a negative arrow on the euro today primarily because the dollar remains in demand and ECB speakers today," said Chris Turner, head of currency strategy at ING. "Anyone could be asked about negative deposit rates and repeat (ECB chief) Mario Draghi's line that the ECB is technically ready."

Lowering the deposit rate to negative would make holding euros unattractive and lead to a broad sell off, traders say.

ECB board members, Beniot Coeure, Yves Mersch, Joerg Asmussen and Peter Praet are due to speak at various times of the day and could fuel debate over whether the ECB is likely to introduce negative deposit rates in coming months.

The euro held its ground against the struggling Australian dollar, rising 0.6 percent to a 1 1/2 year high of A$1.3219. The Aussie has lost considerable ground as hedge funds have sold it aggressively in recent weeks. It was trading down 0.6 percent at $0.9741, a 11-month low.

(Editing by Chris Pizzey, London MPG Desk, +44 (0)207 542-4441)

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