FOREX-Dollar rebounds from recent slide with more gains seen

Fri Jul 12, 2013 11:57am EDT

Related Topics

* Dollar up on view that U.S. will be first to halt stimulus

* U.S. consumer sentiment slipped in July

* U.S. inflation data shows increase in price pressures

* Higher Portuguese bond yields weigh on euro

By Julie Haviv

NEW YORK, July 12 (Reuters) - The dollar rose broadly on Friday as investors bought back the currency in the wake of a steep selloff, confident that the U.S. Federal Reserve will be the first major central bank to step away from ultra-loose monetary policy.

Investors had aggressively shed long dollar bets after U.S. Fed Chairman Ben Bernanke cast doubts on Wednesday over when the central bank will start slowing its asset-purchase program. That reversal caused the dollar to retreat from a three-year high against a basket of six currencies reached earlier in the week.

Bernanke's comments, however, did not change the market's overwhelmingly bullish stance towards the dollar.

While the Fed's bond-buying program is largely deemed as negative for the dollar because it is viewed as tantamount to printing money, the U.S. economy is on a much firmer footing than most of the euro zone, Japan and Britain.

The ECB, the Bank of England and the Bank of Japan are all looking to ease monetary policy further. On the other hand, an outperforming U.S. economy should support expectations that the Fed will be the first to pare some of its stimulus this year.

"There is some argument for suggesting that the shock effect of a dovish Bernanke has largely been digested," said Alan Ruskin, global head of foreign exchange strategy at Deutsche Bank in New York.

"Even if he tries to avoid changing his tone, any policy surprises are more likely to be in a positive dollar direction than the reverse," he said.

Bernanke said on Wednesday that a highly accommodative monetary policy would be needed for the foreseeable future, pouring cold water on investor expectations that the Fed would start unwinding its stimulus program in September.

Nevertheless, worries about rising interest rates and falling stock prices hit U.S. consumer sentiment in early July, while other data showed a firm rise in wholesale prices that could make the U.S. Federal Reserve more comfortable reducing its monetary stimulus.

In late-morning New York trade, the dollar index rose 0.3 percent to 83.019, although it was still down for the week. Against the yen, the dollar was up 0.4 percent at 99.34 yen.

"We are still structurally bullish dollar across a range of currencies, including the euro and sterling," said Chris Walker, a currency strategist at Barclays in London.

The dollar had previously gained in sync with rising U.S. Treasury debt yields and widening interest-rate differentials. Treasury yields, which move inversely to price, have fallen in recent days as Bernanke's comments caused investors to reassess the central bank's plans for its bond-buying program.

"What we saw this week was a washout of long dollar positions, but also a realization that Fed tightening is still some way out. It's tapering of stimulus that will come first," said Walker, adding that high-yielding currencies such as the Australian dollar would lose more ground in coming weeks.

Traders are also cautious about the commodity-linked Aussie before the release of China's growth data on Monday. The Australian dollar was down 1.4 percent at $0.9058.

Analysts' forecasts point to China's economic growth slowing modestly to an annual rate of 7.5 percent in the second quarter , but many economists see downside risks after a run of disappointing data.

Solid U.S. retail sales and housing data, scheduled for release next week, would once again highlight the divergence in growth between the United States and its peers - the euro zone, Britain and Japan.

One of the ECB's top policymakers, Peter Praet, said the bank will keep interest rates at current levels or cut them even further, as long as inflation remains moderate.

The euro, meanwhile, pared losses versus the dollar as Portuguese bond yields came off their session highs. Yields climbed after Lisbon delayed its creditors' next review of the country's bailout because of a political crisis.

Against the dollar, the euro was last down 0.4 percent at $1.3048 after earlier falling as low as $1.2998, according to Reuters data.

FILED UNDER: