FOREX-Dollar holds firm as markets eye Fed's departure from easy money

Mon Jul 1, 2013 1:45am EDT

Related Topics

* Dollar index near 4-week high

* Aussie dlr skids to three-year low, more losses seen

* Dollar/yen could test Ichimoku cloud top above Y101

* Focus on central banks' meetings this week, Friday's US jobs data

By Wayne Cole and Hideyuki Sano

SYDNEY/TOKYO, July 1 (Reuters) - The dollar was broadly firm on Monday as traders greeted the start of a new quarter that could see the U.S. Federal Reserve beginning to wind down its stimulus, even as other major central banks are expected to maintain their super-easy monetary policy.

The Australian dollar touched near three-year lows versus the U.S. dollar, though it managed to stage a modest comeback in the wake of a less dire-than-expected reading on China's manufacturing sector.

Friday's report on U.S. payrolls will be even more critical than usual as a upside surprise would only fan speculation about an early start to tapering by the Federal Reserve, likely lifting both Treasury yields and the dollar.

"This week will be huge for bond bears if the payrolls report validates the Fed's decision to lower its unemployment forecasts," noted analysts at JPMorgan.

Rising yields and an improving domestic economy give the U.S. currency a big advantage over the euro and yen where policy is expected to stay super-easy for a long time to come.

That is reflected in the dollar index which hit a four-week peak of 83.344 on Friday, having recovered all the way from a 80.498 trough in just eight sessions. The index was up a shade at 83.136 on Monday.

Against the yen, the dollar rose to a high of 99.55 yen , a level not seen in nearly four weeks, before giving up some the gains to trader at 99.38 yen, still up 0.2 percent from late New York on Friday.

"Technically, the dollar/yen seems firmly supported at the bottom of Ichimoku cloud and it looks like it could test the cloud top near 101.30 yen," said Bart Wakabayashi, head of forex at State Street Global Markets in Tokyo.

"The market will focus on the Fed's tapering of stimulus, unless there's a clear signal from the Fed that it will not be on the cards this year," he added.

Indeed, Fed Governor Jeremy Stein on Friday highlighted September as a possible time when the U.S. central bank will need to consider reducing its bond-buying programme.

Japanese economic news continued its better run with sentiment at big manufacturers improving markedly in the latest Bank of Japan survey. Notable was a big rise in business investment plans.

Yet these are just early days in the BOJ's massive quantitative easing campaign which is set to run for much of the next two years.

Against the euro, the dollar was on top at $1.3010 and angling to test resistance in the $1.2983/2990 area.

The European Central Bank and the Bank of England have policy meetings on Thursday and the former is likely to emphasise that the eurozone economy is in a much different stage of recovery than the United States.

"President Draghi is likely to use the press conference to "speak soft", said analysts at RBC Capital Markets.

"We expect the ECB to continue emphasising that extraordinary accommodative policies will continue, and that it has other options if looser monetary policy is needed."

Also holding a policy meeting this week is the Reserve Bank of Australia (RBA) and, while it is widely expected to hold rates steady at 2.75 percent, analysts suspect it will welcome the recent decline in the local dollar while keeping a bias to ease further.

The Australian currency touched a three-year low of $0.9110 early Monday and traders assume it is only a matter of time before it tests 90 cents, though it has rebounded after China's manufacturing data turned out to be less dire than expected.

China's official purchasing managers' index (PMI) slipped to 50.1 in June from 50.8 in May, but was above the median forecast of 50.0. However, a separate private report painted a slightly gloomier picture of the sector.

"Chinese economic outlook is still uncertain, so Asian emerging market currencies and the Aussie will remain under pressure for the time being," said a trader at a Japanese bank.

The Aussie last stood at $0.9192, up 0.5 percent from late U.S. levels.

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