FOREX-Dollar weighed down as Summers withdraws Fed candidacy
* Dollar touches near four week low vs currency basket
* Summers drops from race to be next Fed chief
* Fed Sept 17-18 meeting still main focus
LONDON, Sept 16 (Reuters) - The U.S. dollar struggled near a four-week low against a basket of currencies on Monday after the withdrawal of Lawrence Summers from the race to head the Federal Reserve, suggesting a more gradual approach to tightening monetary policy.
Summers is perceived by markets as relatively hawkish and his decision could leave Janet Yellen, a well-known policy dove, as front runner for the top job. President Barrack Obama has accepted Summers' withdrawal.
The dollar index was flat at 81.148, but not far from the intra-day trough of 81.047, its lowest since Aug. 21. Support was cited at the 100-week moving average around 80.85.
"Markets expected Summers to be the more hawkish candidate, so we saw dollar move lower on his withdrawal," said Carl Hammer, chief currency strategist at SEB Merchant Banking.
But he added that the effect could be short-lived and that it would be tough to see the dollar move much lower ahead of the Fed meeting on Sept 17-18.
Against the yen, the dollar was down 0.5 percent at 98.88 yen, close to the day's low of 98.45 yen which was the lowest since Sept. 2.
The euro was up 0.4 percent at 1.3351, having jumped to a 2-1/2 week high around $1.3383 earlier. Strategists said the pair could now target the Aug. 20 high of $1.3453.
The news of Summers' dropping out of the race also capped U.S. 10-year Treasury yields, which hit an intra-day trough of 2.801 pct, its lowest since Aug. 30 and some way off the 3.007 pct on Sept. 6, which was a more than two-year high.
The dollar was already under pressure on recent disappointing economic data and as markets braced for the Fed to scale back its massive $85 billion monthly bond-buying stimulus by a modest $10 billion this week.
"The expectation, and hope, is for a dovish outcome," said Satoshi Okagawa, senior global markets analyst for Sumitomo Mitsui Banking Corporation in Singapore.
Risky assets could take a hit if the Fed were to taper its stimulus by a larger than expected amount, such as by $20 billion or more, Okagawa added.
If the Fed trimmed by a larger-than-expected $15 billion, the dollar could get an initial knee-jerk boost, but the central bank might have a firm forward guidance message which could drag the dollar lower according to Adam Myers, senior FX strategist at Credit Agricole.
"Markets haven't yet focused on the stronger forward guidance language that could accompany the tapering announcement... for example reinforcing that the Fed funds rate is not going to go up all through 2014 and perhaps 2015... that will be the more dominant factor and pull the dollar lower."
Despite the latest drop in the dollar markets on the whole are holding onto bets for further strength.
Latest Commodity Futures Trading Commission data released last Friday showed that currency speculators increased bets in favour of the U.S. dollar to the highest in six weeks.