FOREX -Dollar struggles to gain traction, Fed minutes in focus

Mon Aug 19, 2013 2:37am EDT

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By Masayuki Kitano

SINGAPORE, Aug 19 (Reuters) - The dollar inched higher versus a basket of currencies on Monday, with the near-term focus on the minutes of the Federal Reserve's July policy meeting due later this week.

Moves in the greenback were subdued overall, with the dollar index edging up 0.1 percent to 81.352 and staying above a seven-week low of 80.868 set earlier in August.

The greenback struggled to gain traction even as the U.S. 10-year Treasury yield set a fresh two-year high of about 2.871 percent on Monday, having exceeded Friday's peak of 2.866 percent.

U.S. Treasury yields have been rising recently on the back of market expectations that the Fed could start scaling back its bond-buying programme as early as September.

Such expectations have been bolstered in recent sessions by some encouraging U.S. data, including a drop in weekly jobless claims to a near six-year low.

Still, while higher U.S. yields can increase the attractiveness of dollar-denominated assets and give a boost to the dollar, the impact has been offset recently by an improvement in euro zone and UK economic indicators, which have given a lift to the euro and sterling and kept a lid on the greenback.

A focal point for markets this week is the minutes of the Federal Reserve's July 30-31 policy meeting, due to be released on Wednesday.

"July's FOMC meeting minutes will be closely read to see whether officials were concerned about the summer rise in U.S. market interest rates holding back the recovery," Mansoor Mohi-uddin, head of foreign exchange strategy for UBS, said in a weekend research note.

"If the minutes still point to the FOMC committee continuing to consider slowing down bond buying, the dollar will benefit," he added.

Against the yen, the dollar edged up 0.2 percent to 97.69 yen.

The impact of the Fed minutes on the dollar's moves versus the yen will hinge on the reaction of equity markets, said Koji Fukaya, CEO at FPG Securities in Tokyo.

"The short-term outlook will depend on what happens to equities," he said. "If they fall further, we could see a risk-off type of short-covering in the yen," Fukaya added.

Market expectations that the Fed will start scaling back its monetary stimulus have recently dented U.S. equities as well as Japanese shares, and given support to the yen.

The euro eased 0.1 percent to $1.3324, having backed off Friday's intraday peak of $1.3380. Still, the single currency was not too far from a seven-week high of $1.3401 set on Aug. 8.

While the euro has been supported by a recent run of solid European economic data, such a situation probably won't last for too long, said Daisuke Karakama, market economist for Mizuho Bank in Tokyo.

"I think the April-June GDP will be the peak for the euro zone this year," Karakama said.

Data released last Wednesday had shown that the economies of Germany and France grew faster than expected in the second quarter, pulling the euro zone out of a 1-1/2 year-long recession.

"Since Europe will probably worsen from here, I think there will be a phase when the dollar starts to attract demand against the euro," Karakama added.

The Australian dollar edged up 0.4 percent to $0.9215, having risen to as high as $0.9234 earlier, where it met heavy technical resistance. Traders suspected that the bounce had more to do with how short the market had been than any other factor.

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