* Expectations of loose Fed policy weigh on dollar
* Japan PM Abe's election win to see dollar/yen trade higher
* Euro zone PMIs on Wednesday are main focus for the euro
NEW YORK, July 23 The dollar traded lower
against the euro and pared gains against the yen in thin volume
on Tuesday as investors adjusted positions for technical levels
in the absence of any economic data to drive direction.
The dollar earlier moved off a one-month low against a
basket of currencies as investors bet that the currency recently
had declined too far, too fast despite the debate about when the
Federal Reserve would begin to slow its stimulus measures.
But as trading in London wound down and New York failed to
pick up volume with skeleton staff at many trading desks during
the peak summer vacation period, the dollar failed to follow
through on those gains.
The euro rose to its highest level since June 21, as some
investors pushed it to the 50 percent Fibonacci retracement of
the move from the early April low to the mid-June high.
Trading "is more of a technical move in an otherwise very
thin market amid generally soft data and questions on the timing
of tapering," said Omer Esiner, chief market analyst at
Commonwealth Foreign Exchange in Washington.
The euro was 0.2 percent higher at $1.3216 with the
session peak at $1.3230.
Fed Chairman Ben Bernanke's dovish remarks have emphasized
that the U.S. central bank's bond buying will continue in some
form and interest rates are likely to remain low for the
Benchmark yields have fallen as other top Fed officials have
stressed that the timing of any reduction in the central bank's
$85 billion monthly asset purchases would depend on economic
As a result, along with some weaker-than-expected U.S. data,
the dollar has sold off to key support levels. Further downside
will require another round of bad data, analysts said.
"After reactions and over-reactions, global markets seem now
to have learned that tapering does not mean hikes," said Jose
Wynne, head of FX research at Barclays in New York. "This looks
about right. Hence, we expect participants to look into
fundamentals to learn about future directions."
The dollar index was last down 0.2 percent at 82.088,
also its weakest since June 21.
Analysts, however, said the dollar would likely strengthen
in the coming months against currencies such as the euro,
sterling and the yen because the Fed is expected to be the first
major central bank to make its policy less accommodative.
But few anticipate the dollar's rise to be smooth.
Benchmark U.S. 10-year Treasury yields, which
have had a robust correlation with the dollar index, have
slipped in recent weeks. They last stood at 2.5049 percent,
slightly up on the day but well below the 2.755 percent hit on
July 8, their highest since August 2011.
"Ten-year U.S. Treasury rates have stabilized in a range
that is broadly consistent with a more normal risk premia,"
The dollar was up 0.1 percent at 99.78 yen,
recovering from a one-week low of 99.13 yen earlier.
Analysts said Japanese Prime Minister Shinzo Abe's decisive
upper house election win last weekend would pave the way for
pro-growth fiscal policies and for further Bank of Japan
monetary easing, which would weaken the yen.
The dollar is up more than 15 percent versus the yen this
year, and the recent slide in dollar/yen has likely bottomed
out, according to trends in the options market.
Investors are looking to flash Purchasing Managers' Index
data on Wednesday as worries about euro zone economies are
re-emerging. Analysts said there would probably be selling into
any rebounds in the euro.
Analysts said the onset of holidays has reduced volumes and
volatility, which could result in most currencies trading in
Some $3.8 billion in euros had changed hands, according to
Reuters Dealing data on Tuesday, and $1.97 billion in yen.