FOREX-Dollar treads water after this week's dive

Fri Jul 12, 2013 12:04am EDT

Related Topics

* Speed of retreat leaves USD bulls chastened for now

* Asia turns cautious ahead of Chinese GDP data

* Japanese participants quiet ahead of Monday holiday

By Lisa Twaronite and Wayne Cole

TOKYO/SYDNEY, July 12 (Reuters) - The U.S. dollar took a breather on Friday after tumbling in the previous session from recent highs as fading expectations of an imminent reduction in the U.S. Federal Reserve's stimulus gave way to caution ahead of next week's Chinese growth data.

The dollar's movements have tracked U.S. Treasury yields, which had been in an uptrend since Fed chief Ben Bernanke said last month that the economy is improving enough for the Fed to begin scaling back its monthly $85 billion in asset purchases.

Benchmark U.S. yields hit a 23-month highs on Monday, but pulled back sharply after Bernanke said on Wednesday that a highly accommodative monetary policy was needed for the foreseeable future.

"The market is looking for some new good or bad factors, but there's not so much information, except for U.S. Treasury yields," said Masashi Murata, senior currency strategist at Brown Brothers Harriman in Tokyo.

"Still, it's a little bit hard to buy the yen at the moment," he added. "Japanese participants do not want to take positions ahead of a Japanese holiday on Monday," particularly with a key reading on the Chinese economy due that day, he said.

Median forecasts are that China's gross domestic product growth slowed modestly to a 7.5 percent pace in the second quarter, but many economists see risks to the downside after a recent spate of disappointing data.

Since most economist and market participants maintain their view that the Fed is likely to start tapering its stimulus before any other major central banks, interest rate expectations continued to favour the greenback over the longer term.

But after this week's gyrations, investors could be more cautious about piling into dollar-long positions, making its uptrend less of a one-way bet.

Analysts at JPMorgan noted the impulsive nature of the dollar's retreat had muddied the technical waters for the currency and increased risk of a deeper pullback.

"It's going to be more of a zig-zag than a straight line," said a dealer at an Australian bank in Sydney. "The fact that Bernanke could sink the dollar with just a few well-chosen words was a warning to bulls not to get too carried away here."

The dollar index, which tracks the U.S. unit against a basket of six currencies, flattened out from late U.S. levels at 82.762 on Friday, after diving all the way to a Thursday session low of 82.418, its lowest since June 25 and far below a three-year high of 84.753 touched on Tuesday.

The euro was also steady at $1.3092, having been as high as $1.3201 the previous session. It has gained about 2.5 percent since late Wednesday, its biggest two-day jump since 2011. The single currency was trading as low as $1.2754 on Tuesday, its lowest since April 4.

Stop-loss sell orders were cited at $1.3005/10, dealer said.

The dollar found a ledge of support against the yen at 99.02 yen, after it plunged from 101.21 on Wednesday to as low as 98.27 yen on Thursday.

Dealers emphasised that the huge trading range on the dollar in recent days had taken out orders and stops on both sides, leaving desks with little in the books for the near term.

The Australian dollar ran into selling in New York on Thursday, which pushed it to a low of $0.9118 from a session high of $0.9305, a two-week peak.

The Aussie was down about 0.3 percent against the dollar at $0.9158 on Friday, with the upcoming China data in focus. China is Australia's single biggest export market and the Aussie is often sold as a liquid proxy when investors want to hedge against weakness there.

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