* Fed minutes prompt expectation of easing next month
* Dollar index falls below Ichimoku cloud
* Some say Fed may just extend its promise to keep rates low
* Soft China PMI cuts gains in euro, Aussie
By Hideyuki Sano
TOKYO, Aug 23 The dollar hit a two-month low
against a basket of currencies on Thursday after minutes of the
U.S. Federal Reserve meeting surprised traders by suggesting it
is willing to deliver more stimulus "fairly soon".
That helped to lift the euro to a seven-week high against
the dollar, though the euro cut gains after weak Chinese
manufacturing data underscored concerns about a slowdown in the
world's leading growth engine.
"The minutes were quite dovish, leading you to think that
there will be some form of easing next month unless upcoming
payroll data is surprisingly strong," said Ayako Sera, senior
economist at Sumitomo Mitsui Trust Bank, referring to the U.S.
employment report due on Sept. 7.
The dollars index dropped to its lowest level in two months
to 81.368 .
In Asia, it managed to stay above 81.36, the 50 percent
retracement of its May-July rally, though in a bearish technical
sign, the index has fallen below the bottom of the cloud on the
daily Ichimoku chart.
While some market players expect the Fed's likely easing to
come in the form of a third round of bond buying, otherwise
known as quantitative easing, others cautioned that the Federal
Reserve may take a softer approach, such as extending the period
it plans to keep exceptionally low rates in place instead.
The Fed has pledged to keep low rates at least through late
"Given mixed economic indicators of late, I doubt the Fed
will embark on QE3 in September. If the Fed just extends the
period of low rates, the impact on the currencies will be
limited," said Makoto Noji, senior analyst at SMBC Nikko
As U.S. economic indicators since the Fed's policy board
last met on July 31 - Aug 1 were fairly upbeat, the market is
now hunting for clues on the latest thinking of Fed Chairman Ben
Bernanke, who will give a speech at the annual informal
conference of central bankers and economists at a retreat in
Jackson Hole at the end of this month.
NO CRISIS NOW
As the dollar wilted, the euro rose to a seven-week high of
$1.25534 and could rise further on option-related buying
to around $1.26 in the near term, some traders said. It last
traded at $1.2545.
The euro has gained more than four percent from its two-year
low of $1.2042 hit late July, also helped by expectations that
the European Central Bank will announce plans to help lower
Spanish and Italian bond yields at its next policy meeting on
Talk between Greece and its lenders, in particular the euro
zone paymaster Germany, now looks likely to continue well into
next month, wrongfooting euro bears who expected a major
showdown later this week could stoke concerns of another crisis.
German Chancellor Angela Merkel said on Wednesday she and
Greek Prime Minister Antonis Samaras will not make any decisions
during their talks on Friday, adding she would wait for the
lenders' report on Greek progress in meeting targets. That
report is not expected until late September.
The euro, and the Australian dollar too, trimmed gains after
the HSBC Flash China manufacturing purchasing managers index
(PMI) fell to a nine-month low, a signal that a slowdown in
growth has extended deeper into the third quarter.
"The data failed to dispel pessimism on the Chinese economy.
The market will retain a cautious view on China, which will
likely cap commodity currencies," said Koichi Takamatsu, head of
forex at Nomura Securities.
The Australian dollar stood at $1.0520, up slightly
on the day but off its 10-day peak of $1.0546 hit earlier in the
The U.S. dollar was soft against the yen after making its
biggest one-day loss in nearly two months on Wednesday following
the Fed's minutes.
The dollar fell to 78.273 yen late on Wednesday, its
weakest in over a week, and last traded at 78.55 yen, down more
than a full yen from a five-week peak hit on Monday.
Still, the dollar is likely to be supported around
77.50-78.00 yen for now, analysts say, because of wariness about
intervention by Japanese authorities.
Talk of the Fed easing could prompt the Japanese central bank
to consider easing as well, they said.
"When the Fed eases its policy, the dollar could fall below
78 yen. But I don't expect the dollar to fall substantially
below 78 yen before any actual easing by the Fed," said Sumitomo
Mitsui Trust's Sera.