FOREX-Dollar edges off low but gains limited ahead of Fed minutes

Wed Aug 21, 2013 7:09am EDT

Related Topics

* Dollar recovers from 6-month low vs euro

* Weighed down by Fed tapering doubts

* Market awaits Fed minutes due later on Wednesday

By Anooja Debnath

LONDON, Aug 21 (Reuters) - The dollar inched off a six-month low against the euro on Wednesday but was kept in check by concerns over how much light U.S. Federal Reserve minutes due out later will shed on when the bank will begin trimming its stimulus.

Speculation that the U.S. central bank will begin reducing its $85 billion a month in asset purchases from September has underpinned the dollar while lifting Treasury yields.

The minutes of the Fed's July meeting are due at 1800 GMT.

"The Fed minutes are very important, and perhaps some are getting worried that risks are tilted towards a disappointment," said Kasper Kirkegaard, FX strategist at Danske Bank.

"Our main scenario is that the Fed will begin tapering in September. If the Fed shows any concerns about low inflation or that they need to see a further improvement in the labour markets before tapering, it could send the dollar lower."

But any moves lower in the dollar were unlikely to be drastic as investors have already begun unwinding their long dollar positions in recent weeks.

The dollar was up 0.2 percent against a basket of currencies at 81.12, but still close to Tuesday's two-month low of 80.754.

The euro was down 0.2 percent at $1.3389. But it stayed near Tuesday's peak of $1.3453 - its highest since Feb. 14 - which was hit as the yield premium that 10-year U.S. Treasury notes offer over German Bunds narrowed.

The 10-year U.S. Treasury yield has come down from a two-year high of 2.90 percent set on Monday, as speculation on the Fed stimulus scaleback roiled emerging markets and added a safe-haven element to U.S. debt.

In the options market, overnight implied volatility rose on growing uncertainty about the Fed's stimulus plans. Demand to hedge against excessive price swings usually rises during times of financial uncertainty.

A gauge of overnight euro implied volatility spiked to around 10.6 on Wednesday from the previous session's close of around 6.4, according to Thomson Reuters data.

Strategists said the euro's further rise would be capped as the European Central Bank looks set on keeping interest rates at their current record low of 0.5 percent to support the economy as the Fed backs away from its accommodative stance.

"Even though we broke above the key level of $1.34 (yesterday), there was no strong follow through in the movement. That tells me there aren't too many investors ready to put on euro longs against the dollar," said Niels Christensen, FX strategist at Nordea.

The dollar rose 0.2 percent to 97.46 yen, edging away from a one-week low of 96.91 yen set on Tuesday.

Strategists said the yen was weighed down by comments from the Bank of Japan Governor Haruhiko Kuroda that he will not hesitate to provide further monetary stimulus if downside risks to the economy increased.

Analysts at Morgan Stanley said they maintain their bullish dollar/yen outlook and "consider pullbacks as providing buying opportunities."

"The apparent change in tone by the BoJ's Kuroda, suggesting that they would not hesitate to ease if downside risks increase, is likely to help put the yen back on its weakening trend."

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