FOREX-Dollar hemmed in as yield advantage narrows
* Major currencies locked in tight ranges in Asia
* Focus on US inflation data for hint on Fed tapering
* NZD star performer as domestic data runs hot
By Wayne Cole
SYDNEY, Aug 15 (Reuters) - The dollar was at a standstill on Thursday hamstrung by uncertainty on when the Federal Reserve might start trimming its stimulus, while the euro and sterling drew support from better economic news at home.
The euro was camped at $1.3257, having traded a tight $1.3238-$1.3278 range. It was still uncomfortably close to stop-loss sell orders under $1.3230 and a break there could see it slip to $1.3155/85.
But neither could the dollar make progress on the yen, edging back to 97.90 after failing at 98.50 resistance. Against a basket of currencies, the dollar faded to 81.68 , having balked at 81.88 for two straight sessions.
Part of the dollar's problem is that better data from the euro zone and UK led investors to scale back bets on further easing there.
That has been reflected in the spread between U.S. and German 10-year yields. The premium offered by U.S. debt widened from as little as 30 basis points in February to just over 100 basis points in July, but has since edged back to 89 basis points.
The gap between U.S. and UK yields has contracted to almost nothing, one reason sterling has been the best performing of the 36 most actively traded currencies month-to-date. The pound was firm at $1.5506 on Thursday, after bouncing from a $1.5421 low the previous day.
The market's confusion on the outlook for U.S. policy has been understandable given even the Fed itself seems unsure of when it might taper.
James Bullard, president of the St. Louis Fed, said late Wednesday he had not made up his mind if next month's policy meeting would be too soon to start curbing bond buying, as he was aware of the risks of being too aggressive.
One sticking point for policy makers is the level of inflation, which is too low for some. That will heighten the importance of the consumer price index due later Thursday.
Analysts are looking for increases of 0.2 percent in both the headline and core index, and anything more would add to the case for trimming stimulus and support the dollar.
"We believe that the core CPI reached a trough in June and will gradually rise during the second half of this year," said analysts at Barclays in a note.
"A gradual pickup in prices would help ease concerns on the low rate of inflation expressed by some Fed members, and we continue to expect the Fed to start tapering in September."
With the major currencies trapped in tight ranges, speculators turned to smaller fry for action. By far the stand out performer was New Zealand's dollar which shot higher after strong data on retailing and manufacturing fuelled talk it would be the first developed nation to hike interest rates.
Yields on New Zealand two-year debt surged to 15-month peaks at 3.07 percent, far above the meagre 0.34 percent offered by U.S. Treasuries. The kiwi followed to reach $0.8031, up a cent in two sessions and re-testing resistance around $0.8056.
The neighbouring Australian dollar benefited from recent gains in global commodity prices as markets priced in less risk of a hard landing in China following encouraging data there.
Particularly notable has been a rally in iron ore, Australia's single biggest export earner. The mineral touched a five-month high on Wednesday having risen 29 percent since June.
All of which has helped the Aussie bounce to $0.9120 even after the Reserve Bank of Australia (RBA) chopped rates to record lows last week.
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