September 20, 2013 / 8:40 PM / 4 years ago

FOREX-Dollar inches higher but prospects stay dreary

5 Min Read

* Dollar selloff abates but index is still near seven-month
    * German election outcome this weekend a key focus for the
    * Dollar climbs to one-week high vs yen

    By Gertrude Chavez-Dreyfuss
    NEW YORK, Sept 20 (Reuters) - The dollar on Friday edged up
from this week's seven-month low, helped by comments from
Federal Reserve officials suggesting a reduction in stimulus
could be much closer than many thought.
    St. Louis Federal Reserve President James Bullard didn't
rule out a reduction in stimulus next month depending on U.S.
economic data, while Kansas City Fed President Esther George,
the lone dissenter on the Fed's policy decision, said the U.S.
central bank had sowed confusion and risked the bank's
    "The main takeaway from Bullard and George's comments today
is that the Fed is keeping all of their options open and despite
Wednesday's decision they are still very close to slowing asset
purchases," said Kathy Lien, managing director at BK Asset
Management in New York.
    A tapering of the Fed's bond-buying program is viewed as
positive for the greenback because it entails reducing the
amount of dollars in the market, thereby boosting its value.  
    The greenback was also supported by a resurgence of caution
given a looming Congressional battle over the U.S. budget.
    Still the dollar's outlook, however, remained downbeat,
after the Fed on Wednesday unexpectedly decided to keep its
massive stimulus program intact for now, citing a still high
U.S. unemployment rate and rising mortgage costs. That should
ensure U.S. interest rates would remain low for a long time,
diminishing the allure of dollar-based assets.
    On the week, the dollar index posted its worst weekly
performance in more than two months.
    Samarjit Shankar, director of market strategy at BNY Mellon
in Boston, said the bottom line is that the Fed's decision to
stand pat on its stimulus "has further fuelled dollar pessimism
and risk-on trades."
    But Bullard, a voter on policy this year who has backed
record stimulus, gave hope to the 'taper' enthusiasts, even
though most economists now expect the Fed to reduce its bond
purchases in December. 
    The dollar touched a one-week high against the yen and rose
against the euro after Bullard's remarks. It was last little
changed versus the yen at 99.37 yen, while the euro also
traded flat versus the greenback at $1.3519, having hit a
7-1/2 month high on Thursday. On the week, the euro was up 1.7
percent, its best weekly showing since February. 
    The dollar index was last up 0.1 percent at 80.451, a
little above Wednesday's seven-month trough of 80.060.
    Bullard said this week's decision not to taper was a close
one and that low readings on inflation meant that the Fed can
afford to be patient about the timing of a scale-back in its
bond-buying program.  
    George, on the other hand, noted the "costly steps taken to
prepare markets" in recent months for a policy change, and
warned that the Fed's message has been muddled. 
    Investors, however, remained cautious not only about the
scope and extent of the Fed's eventual exit from quantitative
easing, but also the decision about Fed Chairman Ben Bernanke's
successor and looming congressional budget battles, factors
which could further weigh on the dollar.
    A decision in the congressional battle between rival U.S.
political parties over raising the U.S. debt ceiling to allow
the government to keep borrowing money to pay its bills is
expected to come to a head later this year.
    Even closer is a congressional fight over the federal budget
to avoid shutting down the government. 
    "The spotlight is on Washington and whether a group with a
poor track record of working together cohesively can strike a
budget deal in time to avoid shutting down the government," said
Joe Manimbo, senior market analyst at Western Union Business
Solutions in Washington.
    Analysts said the euro could see marginal impact from
Germany's general election on Sunday. 
    Chancellor Angela Merkel is seeking a third term but there
are doubts she will be able to maintain her centre-right
coalition, which could complicate her euro zone policy. 
    The euro was down 0.1 percent against the yen at 134.31 yen
, not far from a near four-year high of 134.94 yen
touched on Thursday.

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