FOREX-Dollar slips in thin trade, but Fed taper offers support

Mon Dec 23, 2013 4:11am EST

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* Major currencies in holding pattern

* Christmas holiday keeps markets subdued

* Dollar off multi-year highs vs yen

By Anirban Nag

LONDON, Dec 23 (Reuters) - The dollar eased on Monday, tracking a drop in long-dated Treasury yields, though with the Federal Reserve starting to withdraw some of its extraordinarily large monetary stimulus, losses are likely to be limited.

Major currencies were in a holiday pattern amid thin liquidity due to a holiday in Japan, while for most of Europe it was the last full trading session before the Christmas holidays. That left investors and speculators to square positions before the year-end.

The dollar bought 103.98 yen, trading in a narrow 103.92/104.08 range after easing back from a five-year peak of 104.64 hit on Friday. Volumes in the pair were 90 percent below their one-month average, according to Reuters Matching data.

The euro was flat at $1.3680, having climbed off a two-week trough of $1.3625 on Friday. Against the yen, the common currency stalled at 142.20, off a five-year high of 142.90.

"While the potential for speculative dollar/yen profit taking remains substantial given yet another new high, the underlying trend of yen weakness should persist into the new year," said Adam Myers, European head of FX strategy at Credit Agricole.

"Our expectations for dollar buying in early 2014, complementing yen selling pressure should resume see dollar/yen move higher towards our 106 yen end-March forecast."

Part of the reason why the dollar will be sought-after is because short-dated Treasury yields are still moving higher, driven by expectations that the Federal Reserve would continue to trim its bond-buying programme in coming months.

And while long-dated Treasury yields fell on Monday, if forthcoming data out of the United States continued to outperform, rate differentials are likely to move in favour of the dollar, analysts said.

Data on Friday supported the Fed's decision with revised figures showing the world's biggest economy grew at its fastest pace in almost two years in the third quarter.

BNP Paribas analysts said U.S. data needed to meet a certain threshold of strength in order to maintain the dollar's upward momentum.

"With the Fed having begun the tapering process now, the burden of proof has shifted somewhat - data now has to be just strong enough to keep tapering on track, as opposed to the presumably stronger track record needed to justify a start to the tapering process," they wrote in a note to clients.

U.S. data due for release this week include personal income and spending on Monday and durable goods on Tuesday.

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