Dollar up from selloff, Bernanke testimony to set outlook

NEW YORK Mon Jul 15, 2013 4:18pm EDT

A U.S. $100 banknote is placed on top of 100 yuan banknotes in this picture illustration taken in Beijing May 7, 2013. REUTERS/Petar Kujundzic

A U.S. $100 banknote is placed on top of 100 yuan banknotes in this picture illustration taken in Beijing May 7, 2013.

Credit: Reuters/Petar Kujundzic

NEW YORK (Reuters) - The dollar rose against the yen on Monday as traders said a selloff last week was overdone because the Federal Reserve is still likely to be the first among major central banks to move away from ultra-loose monetary policy.

The greenback's gains were trimmed after data showing U.S. retail sales rose less than expected in June, thereby denting expectations of a reduction in stimulus by the Fed this year. But the impact was offset by a separate report showing that growth in New York state's manufacturing sector accelerated in July.

Analysts said the dollar could struggle to rise further before Fed chief Ben Bernanke's congressional testimony on Wednesday and Thursday. The currency lost 1.7 percent last week after Bernanke said a highly accommodative monetary policy would be needed for the foreseeable future.

"If he reiterates his comments from last week, I think we're going to see a little bit more dollar weakness across the board as bets on a September wind-down of QE start looking a little bit further from the truth," said Andrew Dilz, foreign currency trader at Tempus Inc in Washington.

The Fed's bond-buying program, known as quantitative easing, has weighed on the dollar because it equates to printing money and dilutes the value of the currency.

The dollar hit a three-year peak against a basket of currencies last Tuesday as expectations grew the Fed could start reducing its stimulus as early as September. But comments from Bernanke and minutes from the Fed's last policy meeting quashed that view.

The euro erased earlier losses to trade nearly unchanged at $1.3069, up 0.02 percent on the day, according to Reuters data. The euro fell as low as $1.2993 earlier on Monday.

With a slide in German exports, France losing the last of its major triple-A credit ratings and Portugal's political wrangling over austerity measures, the euro's outlook remained fragile.

A slowdown in China's economic growth could also hurt the euro as "major exporters in Europe have put increasing emphasis on Asia and China in recent years, especially following the problems in the periphery," analysts at Morgan Stanley said.

The dollar rose 0.52 percent to 99.73 yen, with support cited at 98.15 yen.

Despite the possibility of a near-term retreat, most investors remain bullish on the dollar over the longer term. Discussions about the Fed have focused on the timing of a reduction in stimulus, they said, while central banks in the euro zone, UK and Japan remain biased for further easing.

"We still buy into the idea of relative out performance of the U.S. economy and that supports the dollar," said Paul Robson, FX strategist at RBS, adding that market uncertainty could, however, weigh on the dollar this week.

Speculators raised the value of net long positions in the dollar to $27.94 billion in the week ended July 9, data from Commodity Futures Trading Commission showed on Friday. <IMM/FX>

The dollar index .DXY, which measures the greenback versus a basket of currencies, rose a scant 0.02 percent on the day to 82.989, recovering from last week's low of 82.418. Support was at its 100-day moving average around 82.670.

Jens Nordvig, global head of FX strategy at Nomura Securities in New York, said comments from Bernanke last week created more uncertainty about the timing of tapering of QE and the Fed's confidence level in the outlook.

"Our read is a bit different. It is clear that the Fed does not want to tighten (raise rates) any time soon. But we still believe taper will happen in September," he wrote to clients.

(Additional reporting by Anooja Debnath in London.; Editing by James Dalgleish and Andre Grenon)

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