FOREX-Dollar claws higher, seen supported by Fed policy view

Tue Jul 9, 2013 12:34am EDT

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* Uptrend for dollar seen intact on Fed's exit plan

* But dollar may face pullback after recent gains - analyst

* Dollar index firmer, but below Monday's 3-year high

By Masayuki Kitano and Ian Chua

SINGAPORE/SYDNEY, July 9 (Reuters) - The dollar inched higher versus a basket of currencies on Tuesday, and its broad uptrend was seen intact as the market positions for when the U.S. Federal Reserve will start to slow its stimulus.

Expectations that the Fed will reduce its bond-buying as early as September are expected to keep the dollar buoyant, although there is caution about its near-term outlook in the wake of recent gains.

"The policy divergences between the Fed and the developed countries like...UK and Japan are likely to widen over time and that will continue to favour dollar strength," said Sim Moh Siong, FX strategist for Bank of Singapore.

In the short term, however, the dollar could retreat as it approaches technical resistance, he said, adding that he was in favour of waiting for such a pullback before buying the dollar.

While the Fed is seen heading toward reducing its monetary stimulus later this year, the European Central Bank has said it would keep interest rates at record lows for an extended period, and the Bank of England has indicated that it is in no hurry to raise interest rates. The Bank of Japan is expected to continue with its aggressive monetary stimulus.

The dollar index, which measures the greenback's value against a basket of currencies, edged up 0.1 percent to 84.268 . The dollar index had set a three-year high of 84.588 on Monday following Friday's upbeat U.S. jobs report.

The euro eased a tad to $1.2861, not too far from a seven-week trough of $1.2806 hit on Friday.

Sim at Bank of Singapore said the euro has support on technical charts in the $1.2700 to $1.2750 area.

Traders said the euro faces resistance around $1.2883, the July 4 intraday low, followed by $1.2923, the July 3 intraday low.

Against the yen, the dollar edged up 0.2 percent to 101.10 yen. On Monday, the dollar had hit a high of 101.54 yen on trading platform EBS, its highest level in nearly six weeks.

Earlier, the dollar pushed up to as high as 101.25 yen. A trader for a European bank in Tokyo said the dollar was buoyed by stop-loss buying by short-term speculators.

The trader said he expected the dollar to eventually grind higher, supported by interest to buy the greenback on dips.

BULLISH ON THE DOLLAR

Gains in the dollar, however, could be tempered if there is any position unwinding in the wake of recent gains. Currency speculators hugely increased their bets in favour of the U.S. dollar in the week ended July 2, while turning negative on the euro.

Investors had grown increasingly bullish on the dollar after the Fed laid out a roadmap for scaling back its asset-purchase programme as the economy improves.

In contrast, the European Central Bank last week broke with tradition by declaring it would keep interest rates at record lows for an extended period, a pledge ECB President Mario Draghi reiterated on Monday.

"We remain bullish USD versus the currencies where central banks are signalling continued policy easing, most notably the EUR, GBP, CHF and JPY," analysts at BNP Paribas wrote in a report.

"We are more cautious versus the currencies of commodity exporter economies, where short positioning is generally stretched and where better U.S. data may provide some cushion against the negative effects of China's slowdown in the months ahead."

The Australian dollar slipped 0.1 percent to $0.9126 , after having set a 34-month trough of $0.9036 last week.

Investors largely shrugged off data showing inflation in China quickened in June as they waited for trade figures on Wednesday.

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