FOREX-Dollar up but on edge ahead of Fed decision

Wed Jan 29, 2014 4:29am EST

Related Topics

* Turkey rate hike eases emerging market anxiety

* But dollar trims gains as focus turns to prospect of more Fed tapering

* Most investors expect Fed to slice $10 billion more off monthly bond buys

By Patrick Graham

LONDON, Jan 29 (Reuters) - The dollar trimmed its overnight gains against the euro and the yen on Wednesday as attention turned to the U.S. Federal Reserve, which is set to cut another $10 billion from the flood of cheap money it is supplying to the U.S. and world economies.

The Fed's symbolic turn away from its emergency policy of the past five years is at the heart of the clearest trend so far in 2014 - a flight of money out of the developing world and into traditional safe havens like the yen and Swiss franc, and beyond that the dollar and the euro.

An emergency interest rate hike in Turkey has halted that move over the past 24 hours, but another round may be in prospect if the Fed moves into full swing in its campaign to rein in bond-buying later on Wednesday.

An influential PMI business survey due early on Thursday will also give a clearer indication of how much China's economy is slowing - the other major risk to world growth this year.

After recovering another half a percent against the yen overnight, the dollar had retreated to a net gain of just 0.2 percent in early European trade.

"We remain conscious of the risks that stand in the way of any risk rally," said Valentin Marinov, strategist with Citibank in London.

By close of trade on Monday, the emerging sell-off had knocked more than a trillion off the value of global stock markets in three days and despite the recovery nerves remain.

Further Fed tightening is bad news for the raft of economies - Turkey, South Africa and Argentina among them - that have become more or less dependent on the flow of cheaply borrowed dollars being put to work in higher-yielding assets.

While that tends to prompt investors in major currency markets to prefer the yen over the dollar, tapering also reduces the supply of new dollars being pumped into the system and is a vote of confidence in the U.S. economy.

Most banks are set positive on the dollar this year as a result, expecting the Fed to finish withdrawing the asset purchase programme by the fourth quarter.

"(Tapering tonight) should allow USD strength to come through against the market's preferred funding currencies of the franc, yen and Czech crown, and also against those overvalued commodity currencies such as the Canadian and Australian dollars," ING bank said in a morning note.

The greenback traded at 103.15 yen, well off a seven-week low of 101.77 yen hit on Monday. The euro gained just under 0.3 percent to 141.12 yen, also moving away from its own seven-week low struck on Monday of 139.25 yen. The euro was up less than 0.1 percent against the dollar at 1.3676.

But the Australian dollar, often used as a liquid proxy for risk trades, had slipped into negative territory, down 0.1 percent to $0.8763.

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