FOREX-Dollar dips on Fed; euro up on German investor sentiment

Tue Sep 17, 2013 11:44am EDT

Related Topics

* Euro gains as German ZEW at highest since April 2010

* Rise limited as focus centers on U.S. Fed meeting

* Markets expect any Fed tapering of stimulus to be modest

NEW YORK, Sept 17 (Reuters) - The euro rose against the dollar on Tuesday after a better-than-expected reading in a German sentiment survey, but gains were muted ahead of a U.S. Federal Reserve meeting expected to result in a tapering of its massive stimulus program.

The ZEW think-tank's poll of economic sentiment rose to its highest level since April 2010, suggesting a growing sense of financial well-being that could support German Chancellor Angela Merkel's chances of winning a third term in Sunday's elections.

The euro's gains, however, were limited with traders reluctant to make fresh bets before the Fed's two-day policy meeting, which begins later on Tuesday. A recent Reuters poll showed economists expect the Fed to reduce its monthly asset purchases by a relatively modest $10 billion.

"The euro's slightly resilient tone is a result of ZEW and the uncertainty surrounding the Fed tomorrow," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington. "We are probably on hold until the Fed with the risk to the dollar being the statement if they taper as expected, but try to anchor expectations that rates will remain low."

Analysts say rate hike expectations hold the key for the dollar because of their impact on short-term U.S. bond yields.

The dollar retreated on Monday after former Treasury Secretary Lawrence Summers withdrew his name from the list of candidates to lead the Federal Reserve, reducing the chances of a rapid cut in monetary stimulus.

The euro last traded up 0.1 percent at $1.3350, nearing a peak of $1.3385 hit on Monday, its highest since late August.

The dollar edged down 0.1 percent against a basket of currencies at 81.191, though it still held above a four-week low of 80.968 set on Monday.

Against the Japanese yen, the dollar was last up 0.2 percent at 99.27 yen, but was expected to stay below chart resistance around 100 yen.

The dollar briefly pared gains against the yen after a report showed U.S. consumer prices barely rose in August, which eases the way for the Fed to start trimming its bond purchases. {ID:nL2N0HC1K4]

A separate report showed foreign investors rediscovered a taste for long-term U.S. securities in July as Japan and China increased holdings of U.S. government bonds, which had suffered a record outflow in June.

According to Treasury data released on Tuesday, foreign holdings of long-term U.S. securities increased by $31.1 billion in July after plunging by $67 billion the prior month.

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