FOREX-Dollar index hovers near six-week high on Fed 'taper' bets

Wed Sep 4, 2013 10:28am EDT

Related Topics

* Dollar sticks to six-week high against other major currencies

* U.S. data boosts bets that Fed to taper stimulus in Sept

* Euro under pressure, ECB likely to reaffirm low rates

* U.S. jobs data on Friday could push dollar higher

By Julie Haviv

NEW YORK, Sept 4 (Reuters) - The dollar held steady on Wednesday, hovering near a six-week peak against a basket of currencies, as encouraging U.S. economic data reinforced expectations that the Federal Reserve would cut back its stimulus this month.

The greenback, which gained against the euro for a sixth straight session, was also sought for its status as a safe-haven on uncertainty surrounding a possible U.S.-led attack on Syria.

Military strikes on Syria moved a step closer on Wednesday after Russian President Vladimir Putin signalled a readiness to drop his opposition if Damascus were proven to have carried out a chemical weapons attack.

Putin's comments come after U.S. President Barack Obama clinched the backing of key figures in Congress for his plan to punish the Syrian government with limited strikes, though no vote on that proposal is due until next week.

The dollar index was down 0.1 percent at 82.294, but still close to Tuesday's peak of 82.516, which was its highest since July 22.

The dollar continuted to be supported by Tuesday's strong data on the U.S. manufacturing sector that firmed bets the Fed will begin tapering at its policy meeting on Sept. 17-18, unless the U.S. payroll numbers due on Friday fall short of forecasts.

"The Fed is likely to taper this month and that is going to keep the dollar underpinned," said Paul Bednarczyk, head of research at 4Cast. "Tapering is going to be the first step towards policy tightening before other major central banks so people will start buying dollars."

Rising U.S. bond yields have also added to the attraction of the dollar. The two-year U.S. Treasury note yield was at 0.43 percent, not far from the 0.442 percent hit on June 26 which was its highest since July 2011.

Meanwhile, data on Wednesday showed the U.S. trade deficit widened slightly more than expected in July as exports dipped, but a rebound in imports pointed to some firming in underlying domestic demand early in the third quarter.

The euro held steady after data showed euro zone businesses had their best month in over two years in August as orders increased for the first time since mid-2011.

Other data showed growth in China's services sector hit a five-month high, underpinned by new orders and business optimism.

The euro was flat at $1.3174, not far from Tuesday's trough of $1.3137, its lowest since late July.

Investors also faced a busy period of potentially market moving events in the next few days, including a G20 summit in St Petersburg, policy decisions on Thursday from the Bank of England, Bank of Japan and European Central Bank, and the U.S. jobs report on Friday.

Positioning is also favoring the dollar according to Ulrich Leuchtmann, head of FX research at Commerzbank.

"People have had dollar short positions over recent weeks, which have become risky ahead of the U.S. jobs report, so some want to get rid of these. This is also driving dollar strength."

The ECB on Thursday is expected to reaffirm it will keep interest rates low to support the euro zone's fragile recovery.

This would be in contrast to the Fed's plans on moving away from its ultra-loose policy, so interest rate differentials will see the euro slip against the dollar.

"If the ECB uses strong language to enforce forward guidance, trying to keep interest rates low, this would be negative for the euro," said Commerzbank's Leuchtmann.

Caution ahead of this week's central bank meetings as well as the possibility of a U.S. military strike on Syria were likely to keep major currency pairs in recent ranges.

The dollar was flat against the yen at 99.56 yen, having tested a one-month high of 99.86 yen on Tuesday.

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