FOREX-Dollar gains on expectations that Fed to end stimulus

Mon Jun 24, 2013 9:15am EDT

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* Prospect of Fed stimulus withdrawal boosts dollar

* Euro holds above chart support after German Ifo

* China worries push Australian dollar to 33-month low

New York, June 24 (Reuters) - The dollar climbed against a basket of currencies on Monday to trade near its highest in nearly three weeks, on rising anticipation U.S. monetary stimulus will be scaled back in the near term.

The shift in sentiment is prompting more investors to unwind bets that the Fed was not ready to end its bond buying program or quantitative easing. The unwinding could take months.

The dollar swung between gains and losses against the yen, but sold off as the New York session began with investors considering the recent five straight day advance was too far, too fast.

Earlier the dollar rose against the Japanese currency, after Bank of Japan Deputy Governor Kikuo Iwata said the central bank still has options for monetary easing, if need be.

The dollar's gains versus the euro were tempered after a survey showing a small increase in German business morale helped keep the single currency above key chart support.

"These flows reflect the repositioning towards a new Fed reality and begin a new trend for the U.S. dollar," said Camilla Sutton, Chief FX strategist at Scotiabank in Toronto. "The violence of the market moves should begin to settle in the coming weeks."

The dollar index, was up 0.2 percent at 82.556 after rising as high as 82.841, its highest since June 5. The gains built on last week's 2.2 percent rally, its biggest weekly rise since November, 2011.

Federal Reserve Chairman Ben Bernanke said last Wednesday that the U.S. central bank could taper its monthly $85 billion in asset purchases if the economy continues to improve.

This helped push up the benchmark 10-year U.S. Treasury yield to its highest in almost two years in Asia on Monday with interest rate differentials moving in favour of the dollar.

The dollar was down 0.4 percent at 97.53 yen, below an earlier peak of 98.70, its highest since June 11.

Changes in the price of the dollar to the yen were mostly in response to moves in European stocks until the BOJ's Iwata spoke. After investors digested Iwata's comments, the dollar surrendered gains as investors traded on other factors.

Iwata, a vocal advocate of reflationary policies, said that if the central bank were to boost asset purchases in the future he would favour government bonds over risky assets, given the huge size of the Japanese government bond (JGB) market.

The euro was last down 0.2 percent at $1.3095 after dropping as low as $1.3058, a level not seen since June 5.

Expecations of tighter U.S. monetary policy contrast with a risk of more interest rate cuts in the euro zone and aggressive monetary easing in Japan.

The BOJ stunned financial markets on April 4 by setting in motion an intense burst of monetary stimulus, promising to double its bond holdings in two years and boost purchases of risky assets in an attempt to jolt the economy out of deflation.

Rate differentials between 10-year Treasuries and similar dated German Bunds have moved in favour of the former, with spreads at their highest since April 2010.

Analysts at Morgan Stanley, who recently recommended selling the euro with a target of $1.28, have lowered their entry level for the trade to $1.3180. A break below the 200-day moving average would be a bearish signal, they said. The 200-day simple moving average is $1.3072, using Reuters data.

Just US$2.59 billion in euros changed hands, using Reuters Dealing data, on Monday morning, with US$2 billion in yen.

The higher-yielding Australian dollar, which is sensitive to concerns about growth in China, was down 0.4 percent at $0.9175, near an earlier 33-month low of $0.9145.

A recent spike in interbank borrowing costs have raised fears that stress in China's banking system could weigh on already slowing growth.

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