FOREX-Dollar drifts higher, but prospects remain dour
* Dollar selloff abates, though index still near 7-month low * German election outcome this weekend a key euro focus * Dollar climbs to one week high vs yen By Gertrude Chavez-Dreyfuss NEW YORK, Sept 20 (Reuters) - The dollar edged up from this week's seven-month low on Friday, helped by comments from St. Louis Federal Reserve President James Bullard who said it was possible the Fed might start to pare back bond purchases in October, depending on U.S. data. The greenback's outlook, however, remained downbeat, after the Fed on Wednesday unexpectedly decided to keep its massive stimulus program intact for now, citing a still high U.S. unemployment rate and rising mortgage costs. That should ensure U.S. interest rates would remain low for an extended period, diminishing the allure of dollar-based assets. Samarjit Shankar, director of market strategy, at BNY Mellon in Boston, said the bottom line is that the Fed's decision two days ago to stand pat on its stimulus "has further fuelled dollar pessimism and risk-on trades." But Bullard, a voter on policy this year who has backed record stimulus, gave hope to the "taper" enthusiasts, even though most economists now expect the Fed to reduce its bond purchases in December. The dollar touched a one-week high against the yen and rose against the euro after Bullard's remarks. It was last little changed versus the yen at 99.38 yen, while the euro also traded flat versus the greenback at $1.3521. The dollar index was last up 0.1 percent at 80.443, a little above Wednesday's seven-month trough of 80.060. Bullard also said this week's decision not to taper was a close one, and added that low readings on inflation meant that the Fed can afford to be patient about the timing of a scale-bank in its bond buying program. However, Kansas City Fed President Esther George, the lone dissenter on the Fed's policy decision, on Friday, criticized the central bank's decision on Wednesday, warning it sowed confusion and risked the bank's credibility given how convinced financial markets were that policy would be adjusted. She noted the "costly steps taken to prepare markets" in recent months for a policy change, and warned that the Fed's message has been muddled. Still, some analysts believe the dollar's longer-term uptrend was still intact. "The main takeaway from Wednesday is that Fed tapering is delayed, not that it has been removed. At some point the Fed will move to taper and we will see U.S. yields move a bit higher and support the dollar," said Sara Yates, global currency strategist at JP Morgan Private Bank in London. U.S. BUDGET SHOWDOWN Investors, however, remained cautious not only about the scope and extent of the Fed's eventual exit from quantitative easing, but also the decision about Fed Chairman Ben Bernanke's successor, and the the looming congressional budget battles. And these factors could further weigh on the dollar. The congressional battle is between rival U.S. political parties over raising the U.S. debt ceiling to allow the government to keep borrowing money to pay its bills. That decision is expected to come to a head later this year. Even closer is a congressional fight over the Federal budget to avoid shutting down the government. "As Congress returns to work in Washington DC, the two parties show no willingness to compromise on the key issues of budget deficit and debt ceiling limits," said Boris Schlossberg, managing director of FX strategy at BK Asset Management in New York. "With (the Republicans) sensing that President Obama has been weakened by his handling of the Syria crisis, their intransigence may only harden as the days go by, with the possibility that the U.S. could face another government shutdown." The euro was down 0.1 percent at $1.3520, having hit a 7-1/2 month high on Thursday. Analysts said the euro could see marginal impact from Germany's general election on Sunday. Chancellor Angela Merkel is seeking a third term but there are doubts she will be able to maintain her centre-right coalition, which could complicate her euro zone policy. The euro was down 0.1 percent against the yen at 134.38 yen , not far from the near four-year high of 134.94 yen touched on Thursday.
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