FOREX-Dollar edges down, Aussie steady ahead of inflation data
* Aussie steadies as investors await inflation data on Wednesday * Dollar briefly drops to one-week low vs. yen, pares losses * Drop in Portuguese yields helps bolster euro By Lisa Twaronite TOKYO, July 23 (Reuters) - The dollar edged lower in Asia on Tuesday as the slide in U.S. Treasury yields over the past two weeks gave investors less incentive to buy the greenback, while the Australian dollar pared gains ahead of domestic inflation data. A low inflation reading on Wednesday would give fodder to those expecting the Reserve Bank of Australia (RBA) to cut rates next month, which would weigh on the currency. Sue Trinh, senior currency strategist at RBC Capital Markets in Hong Kong, said ihat if inflation is near the lower end of the central bank's target range, "it shouldn't really be an obstacle to further rate cuts by the RBA if they're so inclined." Swap markets see a two-in-three chance of an interest rate cut next month, while interbank futures have a 25-basis-point easing to a record low of 2.5 percent fully priced in by October. Also on Wednesday, HSBC will release its flash PMI for China. The Australian dollar was steady against its U.S. counterpart at $0.9253, after earlier rising to a one-week high of $0.9284. It faces stiff resistance in the $0.9292 to $0.9306 area, but remains well above a three-year low of $0.8998 set on July 12. Against the yen, the U.S. dollar dipped to a one-week low of 99.13 yen in early trading but then quickly pared losses to buy 99.51 yen, down about 0.1 percent from late U.S. trade. The recent fall in U.S. yields came after top Federal Reserve officials, including Chairman Ben Bernanke, stressed that the timing of any reduction to the central bank's $85 billion in monthly purchases would depend on economic data. Soft U.S. housing data on Tuesday led to dollar selling and added to the perception that the Fed has no reason to rush to trim its stimulus programme. "There are fewer fears of an imminent Fed tapering, and yields on U.S. Treasuries are off their recent highs," said Masashi Murata, senior currency strategist at Brown Brothers Harriman in Tokyo. "With the Japanese election out of the way, resulting in a confirmed victory for Prime Minister Abe, there is no particular reason to sell yen right now. So we'll be looking at U.S. data for near-term directional signals," he added. Japanese Prime Minister Shinzo Abe's bloc won a widely expected victory in elections for the parliament's upper house on Sunday. While the Fed is eventually expected to taper its stimulus, the Bank of Japan is committed to keeping its ultra-easy monetary stance as it aims for consumer inflation of 2 percent within two years, even against a backdrop of an improving domestic economy. On Tuesday, the Japanese government raised its view on the economy for a third straight month and said deflation was abating as a result of the nation's expansionary policy mix of monetary easing and generous spending. The assessment is in line with the BOJ's view that the world's third-largest economy is finally recovering, boosted by the effects of a weakening yen and its massive monetary stimulus. Separately, an annual government economic report said on Tuesday Japan's economy is showing some signs of bouncing back from prolonged deflation as a result of Abe's monetary easing and budget spending to revive the economy. The euro was up about 0.1 percent at $1.3191, after touching a one-month high of $1.3218 in the previous session. The dollar index, which tracks the greenback against a basket of major rivals, fell slightly to 82.190, holding above a one-month low of 82.047 hit overnight. The euro won some respite from political worries after Portuguese President Anibal Cavaco Silva said the current government will stay in office to keep an international bailout on track. That led the spread of Portuguese bonds over German bunds to narrow.