FOREX-Dollar index near 6-week low, euro helped by year-end flows

Tue Dec 10, 2013 10:49pm EST

Related Topics

* Tapering of Fed stimulus still not seen imminent

* Euro helped by hopes of banking union deal, year-end flows

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By Hideyuki Sano

TOKYO, Dec 11 (Reuters) - The dollar wobbled near a six-week low against a basket of currencies on Wednesday, hurt by the perception the Federal Reserve is in no hurry to trim its monetary stimulus.

On the other hand, year-end repatriations by European banks helped to underpin the euro, as did tighter money market condition and expectations of a banking deal in the euro zone.

"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 80.01, little changed in Asia but not far from a six-week low of 79.843 hit on Tuesday.

The dollar has been capped since mid-November, when Janet Yellen, the incoming 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, a move early next year is seen as more likely.

The dollar's attraction has also been tempered by a widespread belief in markets that Yellen will keep rates low for the foreseeable future even after the bond-buying stimulus has been rolled back.

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.

While the accord is seen as positive for the dollar, traders held off on trading on it. The deal still needs to pass both houses of congress and does not address the debt ceiling that needs to be raised some time next year.

EURO-SUPPORTIVE

In Asian trade, the euro stood little changed at $1.3748 , having risen the previous day to a six-week high of $1.3795, near its year-to-date peak of $1.3833 hit in late October.

Against the yen, the common currency fetched 141.35 yen , having risen as high as 142.19 yen on Tuesday, a level last seen in October 2008.

The common currency, which gained 3.4 percent versus the dollar and 7.7 percent against the yen from its low in November, was also bolstered by the repatriation of funds by European banks.

The banks are under pressure to shore up their capital bases ahead of an ECB asset quality review, which will be based on banks' balance sheets at the end of 2013.

A rise in euro zone money market rates has provided further support for the currency after the European Central Bank last week gave no hint of an immediate easing.

Some traders also cited hopes of a banking union as helping the single currency. European Union finance ministers edged closer to agreeing on a plan to form a new agency charged with closing down ailing euro zone banks and sharing the costs.

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 $1.6440, 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 1.2218 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 102.81 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.

An equally listless Australian dollar dipped 0.2 percent to $0.9135. The Aussie has been undermined by the Reserve Bank of Australia's repeated attempt to talk down the currency to support growth.

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