* Dollar index down from two-month peak
* Solid U.S. jobs data keep December taper view alive
* Diverging Fed/ECB policy path expected to mute euro
By Gertrude Chavez-Dreyfuss
NEW YORK, Nov 11 The dollar fell on Monday after
a two-day rise against the euro as investors locked in gains,
but its prospects remained upbeat on expectations the Federal
Reserve might scale back its stimulus program sooner than
thought following a strong U.S. jobs report.
A U.S. government holiday on Monday kept many investors on
the sidelines and volumes low. While the euro managed to recoup
some of its losses, analysts cautioned against reading too much
into Monday's trading.
The overall expectation is for the dollar to perform
favourably against the euro following a shock interest-rate cut
from the European Central Bank, and a blockbuster U.S. jobs
number last week. That robust employment figure has everybody
talking about a December reduction in the Fed's bond buying,
which should be positive for the greenback because it means
there would be fewer dollars in the financial system.
"Actual or expected tapering will be positive for the
dollar. Further delays of tapering will alter the path but not
the ultimate level of the dollar: higher than here," said
Stephen Jen, co-founder of London-based investment firm SLJ
The euro rose to $1.3416 on lower-than-usual volumes,
but gains were capped as investors began to sell from around
$1.3400 through to $1.3410. The euro hit a two-month low of
$1.3295 last Thursday after the ECB cut its main interest rate
to a record low 0.25 percent.
The euro-zone currency was last trading up 0.3 percent at
"We think this latest bounce in the euro is setting up
potentially good opportunities to enter new shorts against the
dollar and sterling, and against the higher-yielding commodity
bloc currencies," said Vassili Serebriakov, currency strategist,
at BNP Paribas in New York.
Against the yen, the dollar gained 0.1 percent to
The dollar index slipped 0.3 percent to 81.061 after
setting a two-month high at 81.482 following Friday's report
showing U.S. employers added 204,000 jobs in October - well
above the forecast for an increase of 125,000 jobs.
The data was even more surprising as it came in a month when
a budget standoff in Washington forced a 16-day government
shutdown, suggesting the U.S. economic recovery was on a firmer
footing than previously thought.
As a result, U.S. Treasury yields rose, with the gap between
two-year U.S. Treasuries and their German
counterparts at its widest since mid-July. U.S. bond
markets were shut on Monday and with yields rising quickly in
the past week, some expect Treasuries to consolidate.
The benchmark 10-year U.S. Treasury note's yield
was also near a two-month high as some investors brought forward
to December their expectations for when the Fed will start to
withdraw its stimulus.
That underpinned the dollar as rising yields make a currency
more attractive to hold. After the government shutdown, most had
pushed back the Fed's "tapering" expectations to March 2014.
SELL THE EURO
Speculators have cut long euro positions, and this trend
could gather momentum with the euro zone facing a prolonged
period of slowing inflation. That could see the ECB deploying
more aggressive monetary easing instruments.
"We think investors are caught long near $1.3450, with
euro/dollar primed for a move toward $1.32 - a level euro-zone
and U.S. two-year yield differentials would point toward," said
Chris Turner, chief currency strategist at ING in London.
Just $2.89 billion in euros traded on Monday, according to
Reuters Dealing data , making it the lowest-volume day
for the euro since Oct. 21.
Although the ECB's rate-setting committee was split about
Thursday's decision to cut rates, Executive Board member Benoit
Coeure said on Saturday that the bank could trim interest rates
further and provide more liquidity.