* Dollar up versus yen and the euro as Q2 ends
* Investors square positions on quarter's last trading day
* Fed's Stein sees September as possibility for QE reduction
NEW YORK, June 28 The dollar rose against the
yen and euro on Friday, as investors again began pricing in the
possibility that the U.S. Federal Reserve will begin to downsize
its bond-buying program as soon as the September policy meeting.
Fed Governor Jeremy Stein highlighted September as a
possible time when the U.S. central bank will need to consider
reducing the quantitative easing program while speaking on
Friday in New York.
Stein said the Fed's eventual decision to scale back its
asset purchases must be based on the overall economic progress
since it launched the stimulus and not be "excessively
sensitive" to the most recent economic data.
"This specific comment about September sparked speculation
that this will be the month when the Fed starts tapering, which
we also believe is likely because the central bank will not want
to suddenly reduce stimulus right before the holidays," said
Kathy Lien, managing director at BK Asset Management in New
The dollar got an added boost when a report showed U.S.
consumer sentiment improved in late June, ending the month close
to a near six-year high set in May, as optimism among
higher-income families rose to its strongest level in six years,
a Thomson Reuters/University of Michigan survey released on
The euro was last down 0.3 percent at $1.3000 with the
session low at $1.2990. Against the yen, the dollar was
up 0.9 percent on Friday at 99.25 yen.
For June, the dollar fell 1.2 percent against the yen,
snapping eight straight months of gains against the Japanese
currency, while the euro was little changed against the dollar.
"We are settling into the bottom of the recent range (on
euro/dollar) at around $1.3000," said Andrew Dilz, foreign
currency trader at Tempus Inc in Washington. "But there is no
reason not to be trading at $1.3000."
Richmond Fed President Jeffrey Lacker said from West
Virginia on Friday that financial markets should brace for more
volatility as they digest news that the Federal Reserve will
scale back bond buying later this year, but added it was was an
understandable adjustment and will not derail growth.
Investors were also beginning to speculate about what
announcements may come from the European Central Bank policy
meeting next Thursday.
Analysts said growing worries about the euro zone's
faltering economy, in contrast to the relative optimism around
the U.S. economy, could hurt the single currency.
This week European Central Bank President Mario Draghi
pointed out downside risks to growth and said the ECB was
nowhere near exiting its accommodative monetary policy.
"There is speculation that the ECB may do outright
quantitative easing," said David Song, currency analyst at
DailyFX in New York.
While the Fed's asset purchases have weighed on the dollar,
Song said investors would take it as a positive sign if the ECB
ramped up efforts to stoke growth in Europe.
"There is a little bit of a different dynamic on the two
currencies," Song said.
Other analysts cautioned that quarter-end flows were
creating some distortion in market sentiment.
"Today is dominated by quarter-end flows and one should not
be reading too much into the price moves," said Chris Walker,
currency strategist at Barclays in London.
Large funds rebalance their investment portfolios at the end
of the month and the quarter. Their flows and requirements to
square positions often dominate trade on the last trading day.
"The dollar's uptrend remains intact going into next quarter
as we are expecting Fed tapering to start in September," Walker
added. "We forecast euro/dollar to fall to $1.26 in six months
and the dollar to rise to 103 yen in the next three months."
The Australian dollar was last down 0.6 percent against the
Canadian dollar at C$0.9644 and touched a session low
of C$0.9607 after the release of IMF data on central bank
holdings, which for the first time separated reserves in the two
commodity bloc currencies as individual line items.
Central Bank reserves in the Australian dollar totaled
US$98.66 billion, or 0.9 percent of the total reserves of
US$11.09 trillion in the first quarter, slightly more than the
US$94.93 billion, or 0.9 percent, in Canadian dollars.
Some of the selling in the aussie against the loonie may
have come from speculators betting that the aussie's percentage
would have been higher.
There was a spike in Australian dollar volume to AUD$2.1
Volume in the yen also surged to US$3.94 billion around
midday in New York.