FOREX-Dollar bulls in form, euro & sterling trampled

Tue Jul 9, 2013 9:07pm EDT

Related Topics

* Dollar index holds near three-year peak

* Euro at three-month lows vs USD & sterling at 3-yr lows

* China trade data next in focus

By Ian Chua

SYDNEY, July 10 (Reuters) - The dollar hovered at three-year highs against a basket of major currencies on Wednesday as investors took aim at the euro and sterling on growing expectations that central banks in the euro zone and Britain will have to keep policy loose for a long time.

The euro last traded at $1.2779, having slid as far as $1.2755, a level not seen since early April. A break below $1.2740, the April 4 trough, would pave the way for a test of $1.2661, the November 2012 low, traders said.

The move came after a European Central Bank policymaker, Joerg Asmussen, said the central bank's guidance on interest rates staying at a record low extended beyond 12 months.

The ECB later issued a statement saying Asmussen had not intended to give any guidance on the exact length of time for which it expects to keep rates at record lows.

"Although the ECB subsequently clarified and backtracked on this statement, euro zone policymakers clearly remain in a dovish mode and keen to keep rate expectations skewed to the downside," analysts at BNP Paribas wrote in a client note.

Standard & Poor's downgrade of Italy to BBB from BBB-plus on Tuesday gave investors a further reason to sell the common currency.

Sterling wallowed at three-year lows after surprisingly weak UK manufacturing data kept alive expectations of more aggressive monetary easing by the Bank of England. It was at $1.4857 , after falling as far as $1.4814.

The weakness in the euro and sterling helped the dollar index, which tracks the performance of the greenback against a currency basket, hit a three-year high at 84.753.

The index was last up 0.1 percent at 84.670, adding to Tuesday's 0.5 percent rise.

Investors have grown increasingly bullish about the dollar as recent upbeat data cemented the view that the Federal Reserve could start scaling back stimulus as early as September.

"Dollar buying will continue. With rising Treasury yields, there is no incentive to sell the dollar, particularly against the euro," said Masashi Murata, senior currency strategist at Brown Brothers Harriman in Tokyo.

"However, against the yen, there is some risk ahead of Chinese data this week. Any evidence of a slowdown in China will prompt some people to buy back the yen."

Chinese trade data on Wednesday will be closely watched, with any more signs of weakness in the world's second-biggest economy set to weigh on risk appetite.

A standout currency was the Australian dollar, which rose against a host of currencies, including the greenback, and hit one-month highs against the euro and sterling.

The Aussie last stood at $0.9166, having briefly popped above $0.9200 for the first time in a week. The common currency slid to A$1.3895, forming a double-top on the charts that suggested further downside. Sterling sagged to A$1.6154.

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