FOREX-Dollar regains poise after selloff prompted by Fed

Fri Jul 12, 2013 5:00am EDT

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* Dollar earns reprieve from selloff

* U.S. growth outperformance to support dollar

* Investors cautious ahead of Chinese GDP data

By Anirban Nag

LONDON, July 12 (Reuters) - The dollar rose on Friday as investors bought back the U.S. currency at lower levels, confident that the Federal Reserve will be the first of the major central banks to exit ultra-loose monetary policy.

Earlier this week the dollar retreated from a three-year high against a basket of six currencies after U.S. Fed chief Ben Bernanke cast doubts over when the central bank will start slowing its asset purchase programme.

The index rose 0.25 percent to 82.96, although it was still down 1.8 percent on the week. The dollar was up 0.1 percent against the yen at 99.15 yen, while the euro was down 0.5 percent at $1.3035.

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

The dollar fell sharply after Bernanke said on Wednesday a highly accommodative monetary policy would be needed for the foreseeable future, pouring cold water on investors' expectations that the Fed would start unwinding its stimulus programme in September and tightening policy in late 2014.

The greenback had previously been gaining on the back of rising U.S. Treasury yields and widening interest rate differentials in its favour.

"What we saw this week was a washout of long dollar positions, but also a realisation 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 Chinese growth data on Monday. The Australian dollar was down 0.4 percent at $0.9152.

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

"This week was not pretty for some people. With U.S. dollar-longs removed, no one wants to take big new bets ahead of China," said a foreign exchange market researcher at an advisory firm in Tokyo.

Next week is also likely to see solid U.S. retail sales and housing data that will again highlight the growth divergence between the United States and its peers the euro zone, Britain and Japan.

The European Central Bank, 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 the stimulus this year. That would help the dollar regain ground.

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