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

Wed Sep 4, 2013 4:22am EDT

Related Topics

* Dollar steady near 6-week high vs other major currencies

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

* Euro under pressure, ECB likely to reaffirm low rates

By Anooja Debnath

LONDON, Sept 4 (Reuters) - The dollar was broadly steady on Wednesday, with its index sticking close to a six-week peak, as encouraging U.S. economic data reinforced prospects of the Federal Reserve trimming its stimulus in September.

Analysts said some investors also sought the dollar's safety on uncertainty surrounding a possible U.S.-led attack on Syria.

The U.S. currency was supported by high Treasury yields. The two-year bond yield at 0.4264 percent, not far from the 0.442 percent hit on June 26, its highest since July 2011.

The dollar index was steady at 82.368, close to Tuesday's peak of 82.516, which was its highest since July 22.

The dollar was supported by data on Tuesday which showed the U.S. manufacturing sector grew last month at its fastest pace in more than two years, while construction spending rose in July.

The data firmed bets that the Fed will begin tapering its stimulus at its policy meeting on Sept. 17-18, unless U.S. payroll numbers due on Friday fall short of forecasts.

"Good U.S. economic data has helped the dollar. What is important is the U.S. labour market report which is a strong hint for the future course of Fed monetary policy and when they will start tapering," said Ulrich Leuchtmann, head of FX research at Commerzbank.

The euro was flat at $1.3163, close to Tuesday's trough of $1.3138, its lowest since late July.

Data released on Wednesday showed that euro zone businesses had their best month in over two years in August, suggesting the bloc's economy will grow slightly this quarter.

The euro, however, struggled near a one-and-a-half month low against the dollar, before a European Central Bank meeting on Thursday. The ECB 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.

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.

President Barack Obama won the backing of key figures in the U.S. Congress, including top Republicans, in his call for limited U.S. strikes on Syria.

The dollar was flat against the yen at 99.57 yen, having tested a one-month high of 99.86 yen on Tuesday.

The Bank of Japan began its two-day meeting on Wednesday. It was expected to maintain a massive monetary stimulus it launched in April to achieve a 2 pct inflation target.

"I think the BOJ would like to take new actions, to give some expectations to the market, but the Japanese economy remains steady, so for now, they will not act," said Masashi Murata, senior currency strategist at Brown Brothers Harriman.

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