FOREX-Dollar hits 1-week high as markets price for Fed to hold policy

Tue Oct 29, 2013 11:33pm EDT

Related Topics

* Dollar index at one-week highs as USD shorts trimmed

* Markets priced for Fed to stay the course on stimulus

* Aussie extends losses after RBA's latest attempt at talking it down

By Ian Chua and Masayuki Kitano

SYDNEY/SINGAPORE, Oct 30 (Reuters) - The dollar touched a one-week high against a basket of major currencies on Wednesday as investors further trimmed bearish positions ahead of the outcome of the Federal Reserve policy meeting.

Investors had sold the greenback heavily in the run up to the Oct 29-30 meeting on growing expectations the U.S. central bank will maintain its massive bond-buying stimulus programme through to early next year.

As is usual after such a decisive move, investors decided to book some profits ahead of the Fed's decision due 1800 GMT.

The dollar index inched up 0.1 percent to 79.648 , having touched a high of 79.692 earlier on Wednesday, its highest level since Oct. 22. Just last Friday, the dollar index had plumbed a nine-month low at 78.998.

"Fed meetings have not been friendly to the USD this year, with the dollar weakening following every meeting in 2013 with the exception of June," analysts at BNP Paribas wrote in a client note.

"However, with markets already having adjusted to a much more dovish view on the Fed outlook heading into today's meeting, we think the USD is likely to hold up better this time."

The euro held steady at $1.3741, having backed off from a 23-month peak of $1.3833 set just a few days ago.

Traders said the currency's repeated failure to cleanly break above $1.3800 had made it vulnerable to a correction. Since September, the common currency has gained roughly 7 U.S. cents.

Against the yen, the dollar held steady at 98.17 yen, clinging close to a one-week high around 98.28 yen set on Tuesday.

"It's basically some short covering of the dollar, which had been sold earlier," said Satoshi Okagawa, senior global markets analyst for Sumitomo Mitsui Banking Corporation in Singapore.

Market players will probably hold off from aggressive dollar buying, given the uncertainty about the U.S. economy's outlook in the wake of this month's 16-day partial government shutdown, Okagawa said.

The lack of clarity may also help limit dollar selling versus the yen in the next few months, he said.

"Even if you get one or two strong figures, or weak numbers... I think it will be hard to tilt positions too heavily," Okagawa said.

Economic indicators due later on Wednesday include a reading on U.S. private sector employment in October from payrolls processor ADP, which comes ahead of the closely watched nonfarm payrolls data for October due on Nov. 8.

A majority of U.S. primary dealers polled by Reuters last week said the Federal Reserve would not start cutting its monthly bond purchases until March of next year and said the recent government shutdown and standoff over raising the U.S. debt ceiling had significantly impacted on the Fed's timing.

The Australian dollar touched a 2-1/2 week low after having fallen the previous day following the Reserve Bank of Australia's latest attempt at talking down the currency.

The Aussie held steady at $0.9477. It fell to $0.9459 earlier on Wednesday, its lowest level since Oct. 14.

Immediate support is seen around $0.9410, the 38.2 percent retracement of its Aug-Oct rally. A break there will pave the way for a deeper correction.

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