FOREX-Dollar remains buoyant as investors reprice Fed hike call

Thu Mar 20, 2014 1:43am EDT

Related Topics

* Dollar near overnight highs hit as market prices in earlier Fed tightening

* Yellen's comment taken as signalling possible hike early next year

* Dollar strength helps push China's yuan to one-year low

By Lisa Twaronite and Ian Chua

TOKYO/SYDNEY, March 20 (Reuters) - The dollar traded near two-week highs against a basket of major currencies on Thursday, after comments from Federal Reserve head Janet Yellen prompted investors to bring forward their U.S. interest rate hike expectations.

Yellen said the Federal Reserve will probably end its massive bond-buying program this coming fall, and could start to raise interest rates around six months later, which was sooner than many market participants had anticipated.

"That's much earlier than the market had been pricing, so that saw the U.S. dollar strengthen right across the board," said Sue Trinh, senior currency strategist at RBC Capital Markets in Hong Kong.

"Much of the damage was done in the immediate aftermath. We've steadied in Asia, but remain close to the highs for the U.S. dollar across most of the pairs, with the other focus still on China," Trinh said.

China's yuan plunged to a one-year low against the dollar early on Thursday after the nation's central bank set a lower guidance for the currency, largely in line with the greenback's sharp rise on the Fed surprise.

It was the yuan's second consecutive daily fall of more than 1 percent from the central bank's midpoint, after China announced over the weekend it would double its currency's permitted trading range to 2 percent.

The benchmark Treasury yield steadied at 2.748 percent in Asian trade, after jumping 9 basis points to 2.77 percent on Thursday.

The overnight yield spike helped the dollar index mark its biggest one-day move in over a month, to a peak of 80.111, its highest since March 6. It was last at 79.959.

The dollar bought 102.25 yen, not far from its nearly one-week high of 102.69 yen touched on Wednesday, while the euro was steady on the day at $1.3832, after plumbing a two-week low of $1.3810.

The Canadian dollar slid to a 4-1/2 year low of C$1.1273 against its U.S. counterpart and was last at C$1.1244, while the Australian dollar dipped back below 91 U.S. cents and was last at $0.9015.

Markets all but ignored Yellen's emphasis that rates will stay low for a while and could end up staying lower than normal "for some time" even after the economy regains its health given lasting scars from the financial crisis.

That prompted some analysts to warn that this dollar rally could fade just as quickly as it began, in the days ahead.

"There may be some effort by Fed officials or sources to downplay the six-month time-frame comment," BNP Paribas analysts wrote in a note to clients.

A Reuters poll of 17 primary dealers found 10 still expected the first hike to come in the second half of 2015, and four continued to tip 2016.

Yellen's remarks followed the Fed's widely expected move to reduce its monthly purchases of U.S. Treasuries and mortgage-backed securities to $55 billion from $65 billion.

Sterling hit one-month lows against the broadly firmer greenback, as the new Fed guidance trumped an upbeat annual UK budget statement in which the government upgraded its official forecasts for economic growth.

It last traded at $1.6540, having fallen as far as $1.6506 on Wednesday. The pound has been confined to ranges since reaching four-year highs of $1.6823 last month. (Editing by Richard Pullin & Shri Navaratnam)

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