FOREX-Dollar recovers, central banks seen buying euro

Wed Apr 9, 2014 4:22am EDT

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By Patrick Graham

LONDON, April 9 (Reuters) - The dollar bounced back a third of a percent against the yen on Wednesday after its biggest fall in more than seven months against the Japanese currency, while the New Zealand and Australian dollars both made some progress.

A meeting of the Riksbank was an early focus in Europe. The Swedish central bank lowered its path for future rates to reflect the likelihood of a cut. The crown ticked higher before retreating in response.

The dollar fell by more than 1 yen on Tuesday as the Governor of the Bank of Japan dismissed any need for additional stimulus for Japan's economy. That contributed to the dollar's steady decline since U.S. jobs data on Friday, which failed to provide the impetus some had expected for a push higher.

All that leaves major markets back trading in the tight ranges they have held for most of this year. Predictions in January that the dollar would drive higher against the euro and yen this year so far have not been borne out.

"It's not a bad level to buy back into the dollar here (against the yen)," said Graham Davidson, a spot trader with NAB in London. "I tend to think the action we have seen on U.S. (market interest) rates is just a squeeze and they will start to build higher again. That should take the dollar higher."

After hitting lows of 101.55 in U.S. trade on Tuesday, the dollar recovered to 102.05 yen on Wednesday. The euro also added about 0.2 percent, to 140.68 yen.

Like many in the market over recent months, Davidson underlined that the trend for the majors was to hold in tight ranges until there was some clear sign the world's big, developed economies were diverging from the pattern of low inflation and low interest rates.

That may help to explain a chaotic few days of trade, which has seen many of the usual correlations between stocks and higher-yielding currencies and other assets break down.

Analysts at BNP Paribas said that the dollar could make a solid comeback soon.

"We closed our USD/JPY long recommendation flat on Tuesday as the pair fell through our trailing stop set at our entry level," they said. "However, we think the pair is likely to hold above the year's lows around 100.80 and expect the March lows around 101.20 to also provide good support."

CENTRAL BANKS

One striking trend since last week is the euro's resilience in the face of signals from the European Central Bank that it is prepared to consider outright money printing to support growth if need be.

A number of dealers pointed to China's need to re-order the balance of currencies it holds in its reserves after buying billions of dollars last month to weaken the yuan.

"A lot of people thought the euro would go lower, then it didn't," said NAB's Davidson. "I think there are two reasons for that: the euro is still supported by a solid trade surplus and there have been some signs of reserve diversification by a number of central banks."

The euro was flat against the dollar, but firmly in the upper half of its recent range, at $1.3798.

The Australian dollar was up 0.2 percent at $0.9376, after breaking through resistance at $0.9310 to reach $0.9385 on Wednesday, a high not seen since Nov. 20. The New Zealand dollar also gained around 0.3 percent. (Additional reporting by Lisa Twaronite and Ian Chua; Editing by Larry King)

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