FOREX-Dollar index holds near six-month peak

Mon Jul 28, 2014 1:37am EDT

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By Lisa Twaronite and Ian Chua

TOKYO/SYDNEY, July 28 (Reuters) - The U.S. dollar hovered near six-month highs against a basket of major currencies on Monday, holding onto solid gains made last week as investors turned bearish on the euro.

Caution limited its upside, however, ahead of key U.S. economic data later this week and a U.S. Federal Reserve meeting ending on Wednesday which many believe is likely to culminate in the same dovish message from Chair Janet Yellen.

"There is a 'wait-and-see' mood ahead of the U.S. employment figures and the Fed meeting," said Kyosuke Suzuki, director of forex at Societe Generale in Tokyo, who added that the greenback is vulnerable to upside surprises if the jobs data beats expectations.

The Commerce Department is expected to report on Wednesday that the economy grew at a 3.2 percent annual pace in the second quarter, after it shrank 2.9 percent in the previous quarter.

On Friday, the Labor Department's nonfarm payrolls are expected to show a rise of 231,000 in July after they increased 288,000 in June. The jobless rate is expected to hold steady at 6.1 percent.

Yellen said this month that the Fed could raise rates sooner than initially expected if labour markets continued to improve. Still, most economists expect the U.S. central bank to start raising interest rates in the second half of 2015.

The dollar index was steady at 81.045, after it peaked at 81.084 on Friday, a high not seen since early February. So far this month, it has rallied around 1.6 percent, on track for its best monthly gain since January.

Against its Japanese counterpart, the dollar was steady at 101.81 yen.

The latest figures from the Commodity Futures Trading Commission showed currency speculators increased their bullish bets on the greenback in the week ended July 22.

But U.S. Treasury yields remained pinned near recent lows, with the yield on the benchmark 10-year U.S. Treasury note at 2.478 percent in Asia, not far from its U.S. close of 2.469 percent on Friday. The fact that the 10-year yield remains well below 3 percent suggests that investors betting on the dollar were not driven by any material change to the U.S. economic outlook.

But analysts at Barclays believe this week's U.S. data could challenge that perception.

"Overall, we expect a relatively upbeat set of data releases, which ought to give the U.S. dollar further support over the week," they wrote in a report to clients.

"We do not expect the Fed to deliver any major surprises, with further tapering of $10 billion likely to be announced."

The euro, which fell 0.7 percent last week, languished near an eight-month trough of $1.3421 touched on Friday, and was last at $1.3428 in Asian trade. Against the yen, it was buying 136.71, steady on the day and not far from a six-month low of 136.37 yen plumbed on Thursday.

The closely watched German Ifo report on Friday showing a slump in German business sentiment and news the European Union was a step closer to imposing economic sanctions on Russia combined to undermine the common currency.

The dollar also firmed against its Canadian peer, with buy-stops reportedly triggered after the greenback broke above C$1.0800. It was last at C$1.0811, having climbed as far as C$1.0822 on Friday, a high last seen on June 20.

The New Zealand dollar eased to $0.8533, wallowing at six-week lows. It has tumbled nearly 3 percent in the past two weeks, with most of the fall coming after the Reserve Bank of New Zealand (RBNZ) signalled last week it was pausing its tightening cycle following four straight interest rate hikes. (Editing by Shri Navaratnam and Eric Meijer)

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