FOREX-Dollar slips as Bernanke prompts market to reassess Fed plans to scale back QE

Thu Jul 11, 2013 5:20am EDT

Related Topics

* Dollar falls after Fed chief's comments, but uptrend intact

* Bernanke says to continue accommodative policy

* FOMC minutes also suggest stimulus may not be reduced in a hurry

* BOJ holds rates, sounds optimistic on economy

By Anooja Debnath

LONDON, July 11 (Reuters) - The dollar slid on Thursday after comments from Federal Reserve Chairman Ben Bernanke indicated the U.S. central bank may not wind down its asset purchase programme as soon as previously expected.

Major currencies like the euro, sterling and Australian dollar all rose, although traders and strategists said markets had perhaps over-reacted and gains against the dollar would be fleeting. They said they were looking to sell into these rallies as they expect the U.S. currency to resume its uptrend.

Bernanke said the Fed would continue to pursue an accommodative monetary policy as inflation remained low and the unemployment rate might be understating the weakness of the labour market. Fed minutes, however, showed that half of the bank's policymakers think the stimulus programme should stop by the end of this year.

The dollar slipped against a basket of currencies, with its index, falling to 82.418, its lowest since June 25 and down around 2.8 percent from the three-year high of 84.753, touched just two sessions ago. It last stood at 83.005.

The general market view had been that the Fed could begin to scale back its massive $85 billion-per-month stimulus programme by September and perhaps halt it by the end of the year but markets were less sure about those timeframes after the Fed minutes and Bernanke's comments on Wednesday.

Analysts, however, said in the longer term the dollar would strengthen as the Fed's stance of reducing stimulus stands in contrast to other major central banks which look set to remain accommodative, they said.

"There has been an over-reaction in the FX markets as they were so incredibly long dollars heading into the FOMC minutes yesterday," said Adam Myers, senior FX strategist at Credit Agricole. "I still think the dollar's uptrend is intact but the pace will slow given Bernanke's comments."

The dollar index has shared a close correlation with U.S. treasury yields, which touched a low of 2.5568 percent, retreating from Monday's peak of 2.755 percent, which was its highest since August 2011. It was last at 2.5888 percent.

The euro rose to a three-week high of $1.32085 at one stage, up more than 3 percent from Wednesday's low of $1.2765. It was last up 0.6 percent at $1.3045.

The dollar also fell against the yen, dropping to a two-week low of 98.20 yen. It was last down 0.6 percent at 99.11 yen. Chartists said a weekly close above 98.75 yen would be a signal that the dollar is retaining its upward bias.

The dollar extended losses after the Bank of Japan kept its policy on hold and had its most upbeat assessment in two-and-half years. But analysts said the fall in the pair was likely to be short-lived.

"While we expect the dollar/yen correction lower to extend further near term, likely targeting the 95.00/94.00 yen area, we would view this as a longer-term buying opportunity," analysts at Morgan Stanley said in a note.

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