July 12, 2013 / 7:37 AM / 4 years ago

FOREX-Dollar bobs higher, bulls chastened after this week's dive

4 Min Read

* Speed of retreat leaves dollar bulls chastened

* Asia turns cautious ahead of Chinese GDP data

* Japanese participants quiet ahead of Monday holiday

By Lisa Twaronite and Wayne Cole

TOKYO/SYDNEY, July 12 (Reuters) - The U.S. dollar reclaimed some lost ground on Friday as investors positioned for a potential negative shock in Chinese growth data next week, though it was still well below highs hit before the market's reappraisal of the outlook for U.S. monetary policy.

The dollar index, which tracks the U.S. unit against a basket of six currencies, rose about 0.1 percent to 82.858 as it extended a rally from Thursday's low of 82.418.

That was still significantly below a three-year high of 84.753 set on Tuesday, before bulls were routed by comments from U.S. Federal Reserve Chairman Ben Bernanke that cast doubt on an expectations of early start to winding back U.S. stimulus.

"This week was not pretty for some people. With dollar-longs removed, no one wants to take big new bets ahead of China," said a foreign exchange market researcher at an advisory firm in Tokyo.

Median forecasts are that China's gross domestic product growth slowed modestly to an annual 7.5 percent in the second quarter, but many economists see downside risks after a run of disappointing data. The data will be released on Monday.

Dealers emphasised that the huge trading range on the dollar in recent days had taken out orders and stops on both sides, leaving desks with little in the books for the near term.

The euro slipped 0.2 percent to $1.3072, sharply below Thursday's high of $1.3201. The single currency was trading as low as $1.2754 on Tuesday, its lowest since April 4. Stop-loss sell orders were cited at $1.3005/10, dealer said.

The dollar added 0.1 percent against the yen to 99.11 yen , pulling away from Thursday's low of 98.27 yen. It was as high as 101.21 on Wednesday.

"It's going to be more of a zig-zag than a straight line," said a dealer at an Australian bank in Sydney. "The fact that Bernanke could sink the dollar with just a few well-chosen words was a warning to bulls not to get too carried away here."

Bernanke said late on Wednesday that highly accommodative monetary policy was needed for the foreseeable future. The dollar had been gaining significantly as markets positioned for an unwinding of stimulus to start in coming months, and so the comments sparked a sharp sell-off.

"The market is looking for some new good or bad factors, but there's not so much information, except for U.S. Treasury yields," said Masashi Murata, senior currency strategist at Brown Brothers Harriman in Tokyo.

Benchmark 10-year U.S. Treasury yields hit 23-month highs on Monday, but pulled back sharply after Bernanke's comments.

"Still, it's a little bit hard to buy the yen at the moment," Murata added. "Japanese participants do not want to take positions ahead of a Japanese holiday on Monday."

Most economists and market participants still maintain their view that the Fed is likely to start tapering its stimulus before any other major central banks.

That means interest rate expectations are likely to favour the greenback over the longer term, but this week gyrations could make investors more cautious about piling into dollar-long positions and make its recent uptrend less of a one-way bet.

The Australian dollar was down about 0.3 percent against its U.S. counterpart at $0.9163, with the China GDP data in focus. China is Australia's single biggest export market and the Aussie is often sold as a liquid proxy when investors want to hedge against weakness there.

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