FOREX-Dollar index near 6-week low on Fed doubt; euro buoyant

Tue Dec 10, 2013 7:19pm EST

Related Topics

* Tapering of Fed stimulus still not seen imminent

* Euro helped by hopes of banking union deal

* No immediate reaction to budget deal in Washington

By Hideyuki Sano

TOKYO, Dec 11 (Reuters) - The dollar wobbled near a six-week low against a basket of currencies on Wednesday, hampered by a growing view that the Federal Reserve needs more positive economic data before it decides to start reducing its monetary stimulus.

By contrast, the euro drew additional help from expectations of a banking deal in the euro zone while other European currencies, such as sterling and the Swiss franc, benefited from signs of improvement in their economies.

"The fall in U.S. bond yields pressured the dollar. Although the Fed is on course to taper its stimulus, it is still not seen as imminent," said Shinichiro Kadota, chief FX strategist at Barclays in Tokyo.

The dollar index, which measures its value against a basket of six major currencies, stood at 79.98, having hit a six-week low of 79.843 on Tuesday.

The dollar has been capped since mid-November, when Janet Yellen, the next Fed chief, confirmed investors' belief that she will pursue an easy monetary policy to support job growth.

Although a strong reading in last week's payrolls data raised speculation the Fed could trim its bond buying even as early as next week, U.S. bond yields remained below their September peak as investors think Yellen will keep rates low for a long time even after stimulus will have been withdrawn.

The dollar showed no immediate reaction to the news that budget negotiators in the U.S. Congress have reached a two-year agreement aimed at avoiding a government shutdown on Jan. 15.

The news could bolster the dollar, though traders will be scrutinising the details of the deal before jumping to trade on it.

In early Asia, the euro traded flat at $1.3760, having risen to six-week high of $1.3795 and close to its year-to-date peak of $1.3833 hit in late October.

Against the yen, the common currency fetched 141.55 yen , having risen as high as 142.19 yen, a level last seen in October 2008.

EURO-SUPPORTIVE

European Union finance ministers, meeting in Brussels, edged closer to agreeing on a plan to form a new agency charged with closing down ailing euro zone banks and sharing the costs.

The issue is crucial as a banking union is widely viewed as shoring up the euro zone against future debt and financial crises.

"There's some expectation that a deal may be reached before year-end, and that is supportive of the euro," said Sireen Harajli, a currency strategist at Mizuho Bank Ltd in New York.

Other European currencies were also buoyant with sterling sitting near a two-year high against the dollar hit on Tuesday following comments from the Bank of England and strong house prices earlier this week.

The pound stood at $1.6450, near a two-year high of $1.6468 on Tuesday.

The Swiss franc was even stronger, helped by signs that deflation in Switzerland is abating and the economy is growing.

The euro traded at 1.2211 franc, just above a seven-month low of 1.2207 touched on Tuesday, while the dollar hit a two-year low of 0.8850 franc on Tuesday.

The Swiss central bank is widely expected to keep its commitment to the euro/Swiss franc peg at 1.20 francs at its policy meeting on Thursday.

The dollar also sagged against the yen to 102.91 yen, from Tuesday's high of 103.40 yen, though the yen is seen staying under pressure from expectations the Bank of Japan could expand its asset-purchase programme next year to achieve its ambitious inflation target.

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