September 19, 2013 / 6:59 PM / 4 years ago

FOREX-Dollar rebounds after steep losses, but outlook grim

* Dollar index hovers near seven-month lows
    * Fed maintains pace of QE with dovish tone
    * Euro hits 7-1/2 month high

    By Gertrude Chavez-Dreyfuss
    NEW YORK, Sept 19 (Reuters) - The dollar recovered on
Thursday, a day after incurring sharp losses as the Federal
Reserve shocked investors and unexpectedly kept its stimulus
program intact, but its prospects remained bleak with low U.S.
interest rates seen staying for some time.
    Fed Chairman Ben Bernanke, pointing to tightening financial
conditions, on Wednesday refused to commit to reducing the bond
purchases this year. The Fed also cut growth forecasts for 2013
and 2014, citing strains in the economy from tight fiscal policy
and higher mortgage rates. 
    By not tapering, the Fed "has arguably removed the single
most bullish prop for the U.S. dollar," said Richard
Franulovich, senior currency strategist at WestPac in New York.
    The safe-haven yen fell on Wednesday too, sliding to a 3
1/2-year low against the euro, as the Fed's decision
sparked a rally in riskier assets and currencies. So widespread
was the yen sell-off that it also hit a 23-year low against the
Swiss franc.
    "Future tapering has probably ended up being a
meeting-to-meeting call once again, beholden to a small handful
of economic data points," said Dean Popplewell, chief currency
strategist at OANDA in Toronto. "The Fed is correct to be
hesitant. Global growth is precarious at best, and turning the
taps too tight too soon would have a huge global domino effect."
    The dollar index was last up 0.2 percent, at 80.373,
erasing some of the previous session's 1.1 percent drop, its
biggest one-day slide in more than two months, after the Fed
kept the size of its asset-buying program at $85 billion a
month. The general expectation was that the Fed would reduce its
bond purchases by $10 billion.
    The index has fallen to levels not seen since well before
Bernanke in May first floated the idea of reducing the stimulus.
 On Wednesday, it fell to its lowest level since February. 
    The dollar's losses saw the euro hit a 7 1/2-month
high of $1.3568, with this year's high of $1.3711 the target for
some euro bulls, traders said. The euro was last little changed
at $1.3524. 
    Daniel Katzive, currency strategist at BNP Paribas in New
York, however, believes the dollar could eventually fare better 
against the low-yielding currencies such as the yen, euro, and
sterling. He noted that the yen's front-end yields have not
changed much with the Fed decision as the Bank of Japan is still
very much engaged in its own quantitative easing.
    "The ECB (European Central Bank) and, at some point, even
the BOE (Bank of England) could also turn more dovish in the
weeks ahead, offsetting some of the benefit their currencies
have seen post FOMC (Federal Open Market Committee)," said
    The surprise Fed decision saw U.S. Treasury yields tumble
 while riskier assets, like stocks, staged a rally.
Near-term implied volatilities also fell, reflecting healthy
risk appetite, with sharp swings in currencies unlikely.
    Higher-yielding currencies fared well as the tap for cheap
dollars remained open. The New Zealand dollar climbed  
to a four-month high, getting an added lift after data showed
New Zealand's economy grew at a better-than-expected pace in the
second quarter. 
    The rally in riskier assets weighed on the yen. The euro
soared to a 3 1/2-year high against the yen of 134.94 while the
dollar rose 1.3 percent to 99.22 yen, pulling away from
Wednesday's three-week low of 97.75 yen. The dollar/yen peak of
99.58 yen was the highest in four trading sessions. 
    The dollar's moves versus the yen were being influenced by
two conflicting factors, the drop in U.S. bond yields and a
bounce in risk appetite.

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