* Dollar recovers from 6-month low versus euro
* FX volatility rises on uncertainty about Fed stimulus
* Analysts caution Fed minutes may disappoint
By Wanfeng Zhou
NEW YORK, Aug 21 The dollar edged higher from a
six-month low against the euro and gained versus the yen on
Wednesday as traders bet Federal Reserve minutes due out later
in the day will reinforce expectations of a pullback in stimulus
The minutes of the Fed's July meeting will be released at 2
p.m. (1800 GMT). Speculation that the U.S. central bank will
begin reducing its $85 billion a month in asset purchases from
September has underpinned the dollar while lifting Treasury
yields to two-year highs.
"We expect today's FOMC minutes to side in favor with a
September tapering, as long as the data continues to unfold as
expected, and to reiterate that interest rates are on hold for
an extended period," said Camilla Sutton, chief FX strategist at
Scotia Bank in Toronto.
"We expect that this ultimately drives U.S. dollar strength
on a broad basis."
Analysts said the August nonfarm payrolls data, due on
September 6, will be closely watched by investors and
policymakers to determine whether the improvement in the labor
market is enough to justify scaling back stimulus.
The euro was down 0.3 percent at $1.3380. On Tuesday,
it reached as high as $1.3452, according to Reuters data, its
highest since Feb. 14.
The dollar index, which measures the greenback versus a
basket of six currencies, rose 0.3 percent to 81.121.
Gains in the dollar were limited as some analysts cautioned
the Fed minutes may disappoint.
"If the Fed shows any concerns about low inflation or that
they need to see a further improvement in the labor markets
before tapering, it could send the dollar lower," said Kasper
Kirkegaard, FX strategist at Danske Bank.
But any moves lower in the dollar were unlikely to be
drastic as investors have already begun unwinding their long
dollar positions in recent weeks.
Growth-linked, commodity currencies extended their losses as
global equity markets came under pressure. The Australian dollar
was down 0.6 percent at $0.9020. The New Zealand dollar
slid 1.1 percent to $0.7891.
In the options market, overnight implied volatility rose on
growing uncertainty about the Fed's stimulus. Demand to hedge
against excessive price swings usually rises during times of
A gauge of overnight euro implied volatility
spiked to around 10.6 on Wednesday from the previous session's
close of around 6.4, according to Thomson Reuters data.
Strategists said the euro's further rise would be capped as
the European Central Bank looks set on keeping interest rates at
their current record low of 0.5 percent to support the economy.
"Even though we broke above the key level of $1.34
(yesterday), there was no strong follow through in the movement.
That tells me there aren't too many investors ready to put on
euro longs against the dollar," said Niels Christensen, FX
strategist at Nordea.
The dollar rose 0.3 percent to 97.50 yen, edging away
from a one-week low of 96.88 yen set on Tuesday, according to
The yen fell after Bank of Japan Governor Haruhiko Kuroda
said he will not hesitate to provide further monetary stimulus
if downside risks to the economy increased.
Analysts at Morgan Stanley said they maintain their bullish
dollar/yen outlook and "consider pullbacks as providing buying
"The apparent change in tone by the BoJ's Kuroda, suggesting
that they would not hesitate to ease if downside risks increase,
is likely to help put the yen back on its weakening trend."