* Dollar index hovers near four-week trough
* Fed likely to reduce stimulus modestly, sound dovish
By Masayuki Kitano and Ian Chua
SINGAPORE/SYDNEY, Sept 18 The U.S. dollar held
near a four-week trough against a basket of major currencies on
Wednesday as investors bet that any move by the U.S. Federal
Reserve to roll back stimulus will be very modest.
The Fed's highly anticipated rate review ends later in the
day and markets expect the central bank will probably announce a
small reduction to its $85 billion monthly bond-buying
Indeed, since the disappointing U.S. nonfarm payrolls report
on Sept. 6, markets have scaled back expectations on the size of
any pullback in stimulus.
That kept the dollar pinned near a four-week trough against
a basket of major currencies. The dollar index inched up 0.1
percent to 81.181, but still wasn't far from a four-week
low of 80.968 set on Monday.
On the yen, the greenback edged up 0.1 percent to 99.24 yen
The euro held steady at about $1.3354, hovering near
a 2-1/2 week peak of $1.3385 reached on Monday. The common
currency was further underpinned overnight by a closely watched
report that showed German analyst and investor sentiment jumped
more than expected this month.
Overall, traders said there was little conviction in the
market as investors were unwilling to take fresh positions ahead
of the outcome of the Fed's policy review due at 1800 GMT.
Chairman Ben Bernanke will give a news conference after that.
Market consensus is for a cut of $10 billion to the
bond-buying stimulus, twinned with a pledge to keep interest
rates near zero at least until the jobless rate falls below 6.5
percent. Some analysts reckon the Fed may lower the threshold to
Traders said any delay to the tapering may be seen as dovish
by markets and could prompt investors to sell the dollar.
Conversely a bigger reduction of stimulus could be seen as
hawkish, lifting demand for the greenback.
BNP Paribas strategists said their base case scenario is for
the Fed to pass on announcing tapering now, but leave the door
open for reducing stimulus later in the year.
"If they do elect to announce a tapering of purchases, we
expect the pace to be a gentle $10 billion with reduced emphasis
on a mid-2014 end point noted at the June press conference,"
they wrote in a note.
Roy Teo, FX strategist Asia, for ABN AMRO Bank in Singapore,
said ABN AMRO expects the Fed to announce a $15 billion
reduction to its monthly bond purchases and also to revise its
forward guidance on interest rates by lowering the threshold for
the unemployment rate.
Such a scaling back of stimulus by the Fed is likely to
help the dollar rise versus the yen over the next few months,
especially since the market may start positioning for further
monetary easing by the Bank of Japan, Teo added.
"We have 110 for the end of the year," he said, referring to
ABN AMRO's forecast for the dollar versus the yen.
"We...believe that it's highly likely that the BOJ will
further increase its monetary stimulus, given that it's more
likely than not that (Japanese Prime Minister Shinzo) Abe will
increase the sales tax," Teo said.
"Come the end of this year, we could see the market start to
price in that the BOJ would further increase its monetary
stimulus," he said.
BOJ Governor Haruhiko Kuroda said earlier in September that
the BOJ stands ready to take further monetary easing steps if a
planned sales tax hike or other risks derail the economy on its
path to achieving the bank's 2 percent inflation target.
Under a deal reached last year, before Abe's government came
to power, Japan's 5 percent sales tax rate is set to rise to 8
percent next April and 10 percent in October 2015.
A big upward revision to Japan's second-quarter gross
domestic product announced last week, has bolstered expectations
that Abe will go ahead with the planned sales tax hike, with a
decision expected in early October.