U.S. budget drama, Fed uncertainty keep dollar on leash

SYDNEY Thu Sep 26, 2013 7:39pm EDT

A photo illustration shows a $100 banknote placed above Chinese 100 yuan banknotes in Beijing May 10, 2013. REUTERS/Petar Kujundzic

A photo illustration shows a $100 banknote placed above Chinese 100 yuan banknotes in Beijing May 10, 2013.

Credit: Reuters/Petar Kujundzic

SYDNEY (Reuters) - The dollar held onto modest overnight gains in Asia on Friday but was on track to end the week flat, hampered by the threat of a historic U.S. debt default hanging in the air and lack of clarity over when the Federal Reserve will scale back stimulus.

The dollar index .DXY last traded at 80.541, having risen 0.3 percent on Thursday thanks in part to a report showing fewer Americans filed new claims for jobless benefits last week.

The data also helped Wall Street snap a five-day losing streak and drove U.S. Treasury yields a touch higher.

But traders said the greenback was simply consolidating after a big selloff on September 18 when the Federal Reserve wrong footed many investors by maintaining its bond-buying stimulus.

The dollar index has recouped just half of the 1.1 percent drop that day, when it hit a 7-month trough of 80.060. So far this week, it is up a mere 0.1 percent.

Other U.S. figures out on Thursday, including a worrisome decline in consumer prices, underscored the Fed's reluctance to slow down its money-printing press.

Since the surprise decision last week and following a string of speeches by Fed officials, markets are no clearer on when the Fed will eventually taper its stimulus.

Three top Fed officials said on Thursday the central bank had confused markets over its policy outlook.

Investors are now focused on Fed meetings in October and December, although some suspect the central bank could hold fire until early 2014 to make sure the U.S. recovery is firmly entrenched.

The market is also closely watching the political wrangling in Washington.

U.S. House of Representatives Republicans on Thursday refused to give in to President Barack Obama's demand for straightforward bills to run the government beyond September 30 and to increase borrowing authority to avoid a default.

"We argued last week that the Fed was trying very hard to be 'credibly irresponsible'. We hope that U.S. politicians won't be 'irrationally irresponsible' and will eventually reach a sensible agreement on budget and debt matters," analysts at Societe Generale wrote in a note.

"Policy choices are key to the market outlook, but in the grand scheme of things the tapering delay and debt ceiling discussions may just be mere noise. Eventually, U.S. data strength will revive the U.S. dollar rally."

Against the yen, the greenback rose to 99.02 from a one-week low of 98.27, while the euro dipped to $1.3488 from Thursday's high around $1.3536.

Sounding a warning bell for euro bulls, European Central Bank Executive Board member Benoit Coeure said the bank has room to cut interest rates further if needed but does not target a specific level for money market rates.

The common currency managed to hold its ground against its Japanese counterpart to trade at 133.55, not far off Thursday's session peak of 133.93.

Given a dearth of major economic news this week, no clarity on the Fed's next move and the risk of a U.S. sovereign debt default, it's no surprise to see the major currencies settling into a quiet trading range.

Commodity currencies including the Australian dollar have also gone nowhere this week. The Aussie stood at $0.9366, down 0.3 percent on a week that saw it drift in a slim $0.9338-$0.9458 range.

The paucity of market-moving data continues on Friday in Asia, although month-end and quarter-end flows could make for a choppier session.

(Editing by Shri Navaratnam)

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