* Euro trades firm, holds just below two-year high against
* Fed meeting could fuel more dollar selling
* Emerging market currencies seen vulnerable
* Dollar/yen edges up, rate differentials underpin pair
By Julie Haviv
NEW YORK, Oct 28 The dollar edged higher on
Monday but held close to a nine-month low against a basket of
currencies, with most investors convinced that the Federal
Reserve will maintain its ultra-loose monetary policy this week
and in the months ahead.
The Federal Open Market Committee, the Fed's policy-making
arm, is unlikely to make any shift to policy at its meeting on
Tuesday and Wednesday as the Fed awaits more evidence of how
badly Washington's budget battle has hurt the U.S. economy.
Many economists believe the Fed could stand pat for the rest
of the year. Most expect the central bank not to begin
withdrawing its $85 billion per month bond buying program until
"It may turn out that a neutral FOMC is a green light to
keep selling the dollar until November headline data begin
appearing in early December, but as we note above there is
already a lot of dovishness priced in," said Steven Englander,
global head of foreign exchange strategy at CitiFX, a division
of Citigroup in New York.
The government shutdown interrupted data gathering in
October, muddying the picture for Fed policymakers
seeking signs on the economy's strength. Economic data released
since the shutdown ended has been surprisingly weak.
"However, insofar as the Fed gives any hint that the market
has swung too far in the direction of 'QE forever', there will
be risk for emerging market (currencies) and in particular for
the high yielders that investors have bought back with a passion
over the last month," Englander said.
The dollar index, which tracks the greenback against a
basket of six major currencies, last traded up 0.2 percent at
79.308 after earlier falling as low as 79.154, not far
from a near nine-month low of 78.998 touched on Friday.
The longer the Fed keeps its policy loose, the more U.S.
yields stay anchored, making the dollar less attractive to hold.
The central bank's policy-setting committee is to release a
statement on its policy decision on Wednesday, at the end of its
two-day meeting, at 2 p.m. (1800 GMT).
The implied yield on the Fed funds futures contract for
December 2015 has fallen from a recent peak of 1.45
percent to 0.65 percent, highlighting that investors have scaled
back rate hike expectations in 2015 and beyond.
To spur growth, spending and hiring, the Fed has held
overnight rates near zero since late 2008 and has quadrupled its
balance sheet to around $3.7 trillion through three massive
rounds of bond buying in a further effort to keep borrowing
Meanwhile, in thin trade, the euro traded down 0.1 percent
at $1.3786, having risen to $1.3832 on Friday, its
highest since November 2011, according to Reuters data.
Investors are a bit wary of pushing the euro much higher,
however, worried that policymakers at the European Central Bank
may try to talk down the currency in coming days.
Speculation that ECB policymakers may talk down the euro has
gained pace especially after recent economic data, including
German business confidence and purchasing managers' index
surveys, highlighted the fragile economic recovery.
"Eurozone policymaker concern is probably the biggest
restraint for a euro/dollar that looks technically mobile toward
the $1.3980/4000 area," said Tom Levinson, currency strategist
at ING. "The dollar index looks primed for a test of support in
the 78.60/90 area in coming days."
While the dollar is likely to struggle against the euro and
the British pound, it is likely to gain ground against the yen.
The dollar rose 0.3 percent to 97.70 yen, edging away
from a more than two-week low of 96.92 yen hit on Friday.
The dollar was supported by the view that yield
differentials between Japanese government bonds and U.S.
Treasuries will persist, as the Fed eventually moves toward
tapering while the Bank of Japan keeps its ultra-easy stance.
The BOJ is widely expected to maintain its monetary policy
stimulus at its policy review on Thursday to meet its target of
two percent inflation in two years.