FOREX-Dollar drops to 7-week low; yen, sterling post sharp gains
* Dollar slips vs yen after stops triggered below 97.50 yen * Sterling at 1-1/2-month high post BoE Inflation Report * Markets price in earlier-than-expected sterling rate hikes By Gertrude Chavez-Dreyfuss NEW YORK, Aug 7 (Reuters) - The dollar fell to a seven-week low on Wednesday, weighed down by steep losses against the yen and sterling, on concerns about the scope and timing of the Federal Reserve's eventual tapering of its bond-buying program. The yen, meanwhile, rose to a seven-week peak against the dollar on expectations that Japanese investors would convert overseas earnings ahead of a mid-August holiday. Sterling also gained against the greenback, climbing to its highest in 1-1/2 months, after investors brought forward expectations of an interest rate rise from a record low after a news conference by the head of the Bank of England. "Dollar sentiment hasn't been the same since last week's tepid U.S. jobs report which suggested the Fed would move more patiently to slow a stimulus program that has long been a thorn in the dollar's side," said Joe Manimbo, senior market analyst, at Western Union Business Solutions in Washington, D.C. "A slower U.S. data calendar this week also hasn't offered a fresh impetus for investors to bid the dollar higher," he added. The dollar index was down 0.3 percent at 81.345 after it earlier dipped to 81.297 - a seven-week low. The index fell for a fourth straight session. However, the dollar's losses could be limited, especially in the wake of comments on Tuesday from Chicago Fed President Charles Evans, a voting member of the Federal Open Market Committee, who said the U.S. central bank will probably scale back bond buying later this year. Less bond buying by the Fed could lead to higher U.S. interest rates, a potential draw for would-be dollar buyers. The yen, which is sought after as a safe-haven currency, made broad-based gains against major currencies as global stock markets fell. Japanese stocks dropped nearly 4 percent. The dollar came under pressure as a break of 97.50 yen sparked stop-loss dollar selling, which pushed it to a low of 96.41 yen, its lowest level since June 20. It was last trading down 1.1 percent at 96.64 yen. BNY Mellon's indicators showed that the yen has been the most in demand currency for the last seven days, with buying of the Japanese currency at three times the pace of average yen flows over the past year. The euro was also down 0.9 percent against the yen at 128.86 yen. Against the dollar, it was up 0.2 percent at $1.3326. Businesses in Japan shut for several weeks around mid-August for the Obon holidays and market participants expect yen demand from Japanese investors to rise ahead of big capital inflows from interest payments on the country's massive U.S. Treasury debt holdings at around the same time. The pound, meanwhile, was last up 1.1 percent at $1.5509 , recovering from an intraday low of $1.5205 plumbed shortly after the BoE's Inflation Report on Tuesday, which tied future rate rises to a drop in unemployment. At a news conference on Tuesday, BoE Governor Mark Carney said future interest rate rises in the UK would not happen until unemployment fell to 7 percent, something seen unlikely for at least three years. But markets concluded that given a slew of recent upbeat British data, unemployment could come down faster than the BoE's three-year timeframe. After the bank's report, overnight indexed swaps priced in a 90 percent chance of a rate hike from the current 0.5 percent in three years' time, and some chance of this happening as early as 2015. Within four years they priced in a increased probability of two 25 basis point rate hikes. "Market participants are currently observing a situation where the data suggests a better economic outcome than they expected just a month or two ago," said Bob Lynch, head of G10 FX strategy for the Americas, at HSBC in New York. "In a data-dependent world, markets will not be complacent and accepting of central bank forecasts when current data suggests otherwise."
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