Dollar off lows but still vulnerable as Fed meeting looms

SYDNEY Mon Oct 28, 2013 7:17pm EDT

U.S. one-hundred dollar bills are seen in this photo illustration at a bank in Seoul August 2, 2013. REUTERS/Kim Hong-Ji

U.S. one-hundred dollar bills are seen in this photo illustration at a bank in Seoul August 2, 2013.

Credit: Reuters/Kim Hong-Ji

SYDNEY (Reuters) - The dollar clung onto modest overnight gains early in Asia on Tuesday, but stayed near a nine-month trough as investors bet the Federal Reserve will this week set the course for its massive stimulus program to be maintained into early next year.

The dollar index.DXY was steady at 79.344 after drifting up 0.2 percent on Monday. However, it remained not far off Friday's 78.998 - a low not seen since February 1.

A break there could pave the way for a test of this year's trough of 78.918 and then the September 2012 low of 78.601.

Traders said the market lacked conviction and moves were driven more by flows and position adjustments ahead of the Fed policy meeting over Tuesday and Wednesday rather than by fundamentals.

Indeed, investors would probably have sold the dollar if going by the latest string of data that suggested a flagging U.S. economy.

Figures on Tuesday showed U.S. manufacturing output barely rose in September and contracts to buy previously owned homes recorded their largest drop in nearly 3-1/2 years.

"The dollar's ability to gain against this backdrop likely reflects positioning, with USD shorts having built up quickly in October according to our metrics," analysts at BNP Paribas wrote in a client note.

That has left the dollar increasingly less vulnerable to negative news and with more scope to rally if data begins to beat expectations again, they added.

Traders also said it is unlikely the dollar would react too negatively should the Fed choose to wait for more evidence of how badly Washington's budget battle has hurt the U.S. economy before deciding on whether or not to scale back stimulus.

The dollar index has fallen 1.1 percent so far this month, adding to a 2.3 percent slide in September.

One of the key beneficiaries of the dollar's decline has been the euro, which as recently as Friday rose to its highest since November 2011 at $1.3833.

It last traded at $1.3788 after slipping 0.1 percent on Monday. Traders see chart resistance around $1.3800/70 with a convincing break there setting the scene for a retest of the October 2011 peak of $1.4248.

Against the yen, the dollar bought 97.66, having gained 0.3 percent, while the euro fetched 134.62 yen after Monday's 0.2 percent rise.

A standout mover in early Asian trade was the Australian dollar, which dipped about a third of a U.S. cent to a session low of $0.9535 after the head of Australia's central bank again tried to talk down the currency.

Reserve Bank of Australia governor Glenn Stevens said it was likely the Aussie dollar would fall materially in the future given the country's declining terms of trade, a shift that would be welcomed to trade-exposed sectors of the domestic economy.

The Aussie last stood at $0.9542, well off a five-month high of $0.9758 set last Wednesday.

(Editing by Shri Navaratnam)