FOREX-Dollar falls on shifting Fed expectations
* Dollar hits two-week lows against currency basket
* U.S. jobless claims fall, reading clouded by technical issues
* Euro/dollar and dollar/yen one-week implied vols jump
By Wanfeng Zhou
NEW YORK, Sept 12 (Reuters) - The dollar fell from a seven-week high against the yen on Thursday as U.S. bond yields declined and as investors speculated the Federal Reserve will take a more cautious approach toward reducing its stimulus next week.
The euro was little changed against the dollar, recouping losses it made after data showing an unexpected decline in U.S. jobless claims and a contraction in euro zone industrial output.
Analysts said the dollar could remain under pressure going into the Fed's meeting next Tuesday and Wednesday. Uncertainty about the timing and pace of Fed action grew after last week's disappointing U.S. August employment report.
Data on Thursday showing U.S. initial jobless claims fell sharply last week further clouded the picture as much of the decline appeared due to technical problems in claims processing. Before the Fed meeting, U.S. retail sales and consumer prices will be closely watched.
"Unless we get a significant new piece of information, we're going to be in this range-bound pattern, maybe with some bias for dollar weakness, as we wait for the Fed," said Vassili Serebriakov, FX Strategist at BNP Paribas in New York.
The dollar lost 0.7 percent to 99.22 yen, retreating from a seven-week high of 100.60 yen hit on Wednesday, according to Reuters data.
The euro was little changed at $1.3312, hitting a session low of $1.3259 after the U.S. claims data.
Euro zone industrial production fell 1.5 percent in July, compared with a 0.1 percent increase forecast, a sign of the weak demand from European households and the shakiness of the bloc's economic recovery.
European Central Bank President Mario Draghi said Thursday that the recent rise in bank-to-bank borrowing costs was unwarranted. He took a cautious view of the recent signs of stabilization in the euro zone economy, saying the recovery was still "very, very green".
Against the yen, the euro lost 0.7 percent to 132.02 yen . Against the pound, it was trading near a recent 7-1/2 month low.
The dollar index, which measures the greenback versus a basket of six currencies, fell 0.1 percent to 81.411, having hit a two-week low of 81.358, the weakest since Aug. 28.
Markets have tempered their expectations for any aggressive stimulus withdrawal by the Fed. That has led investors to trim long dollar positions built on expectations the Fed will unwind stimulus by a much larger amount.
"It looks like the Fed will only make a modest $10 billion tapering next week. So investors are adjusting their positions accordingly," said Jane Foley, senior currency analyst at Rabobank. "The Fed will be very careful with tapering and will probably only dip its toe."
Reflecting nervousness before the Fed meeting, euro/dollar and dollar/yen one-week implied volatilities - a gauge of how sharp price swings will be in the near term - shot up.
The one-week euro/dollar implied vol was trading at around 7.85 percent, much higher than the one-month implied vol around 7.2 percent. The one-week dollar/yen implied vols were also trading above one-month implied vols.
Sterling cut losses against the dollar and hit a session high against the euro after Bank of England Governor Mark Carney showed no apparent unease over rising bond yields. Sterling was last up 0.1 percent at $1.5823.
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