FOREX-Dollar edges up as Fed debate shifts to size of pullback
* U.S. durables fall 7.3 percent in July, pressure dollar * Dollar/yen dips, still close to highest in nearly 3 weeks * Euro holds steady, dollar index all but flat * Month-end positions should sway flows this week By Julie Haviv NEW YORK, Aug 26 (Reuters) - The dollar edged higher against the euro on Monday as dismal U.S. durable goods data did little to shift expectations that the U.S. Federal Reserve's wind-down of its stimulus program is around the corner. Analysts said the Fed's rollback will be incremental given that the data, which came after soft U.S. housing numbers last week, suggested economic growth this quarter will probably not accelerate as much as economists had forecast. The Fed is seen erring on the side of caution after figures showed orders for long-lasting U.S. manufactured goods recorded their biggest drop in nearly a year in July, and a gauge of planned business spending on capital goods also tumbled. The dollar fell against the euro immediately following the durable goods report, but later recovered. "The data is a sign that the uptick in interest rates is hurting an economy struggling to gain traction in positive growth territory," said Andres Bergero, chief corporate trader at Bank of the West in San Ramon, California. Bergero said the market is convinced that the Fed's tapering will start next month, but because of the weak economic data the reduction will be more like $10 billion instead of the $20 billion to $25 billion estimated earlier. "The quick snapback in U.S. yields and the U.S. dollar suggests that investors are no longer simply betting on a tapering of quantitative easing, but the... taper speculation has become data-centric." The size of the Fed's pullback might also depend a lot on the U.S. August payrolls report due on Sept. 6. Analysts said it would take a very weak reading to push back the start date. The U.S. central bank is expected to make an announcement at the conclusion of its next policy making meeting on Sept. 18. Month-end flows, ahead of the long U.S. Labor Day holiday weekend, should influence price action this week. Portfolio managers are either under or over-exposed to certain currencies, according to Chris Tevere, senior currency strategist at Forex.com in New York. "Our model suggests they may be slightly over-hedged, namely versus the euro," he said. "Consequently they may be too long euros relative to the U.S. dollar and may need to unwind their positioning over the coming days." U.S. dollar net longs narrowed for a fifth straight week to around $13.54 billion in the week ended Aug. 20, according to the latest data available from the Commodities Futures Trading Commission. The euro, at $6.2 billion, held the largest long position versus the dollar. "Ultimately, we believe that timing of tapering will be less important for the dollar than the ability of the U.S. economy to generate faster growth over the last two quarters of the year," BNP Paribas said in a note. "We stick with a long dollar/yen position for now." In trading thinned by a holiday in London, the dollar index, which is strongly correlated with 10-year U.S. yields, was flat at 81.378, but not that far from a recent one-week high of 81.719. Treasury yields, which move inversely to price, fell on Monday. The euro drifted lower to $1.3364, down 0.1 percent, partly weighed by worries about Italy. Italian Prime Minister Enrico Letta met with a top official from Silvio Berlusconi's center-right party on Monday to try to defuse a dispute threatening to bring down Letta's fragile ruling coalition. Investors are worried that Italy's plans to mend its finances will fall apart if the coalition crumbles and that a period without a government could make it tricky for the European Central Bank to shield it from market pressure. Against the yen, the dollar slipped 0.4 percent to 98.38 yen , below Friday's high of 99.15 yen, the U.S. currency's highest level since Aug. 5. It fell as low 98.19 after the durables report, according to Reuters data.
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