* Dollar hits two-week lows against a currency basket
* Markets appear to be positioning for limited Fed taper
* Asian investors taking profits in dollar ahead of holidays
By Anirban Nag
LONDON, Sept 12 The dollar eased to two-week
lows against a basket of currencies on Thursday, as investors
chipped away at its recent gains on growing doubts the Federal
Reserve will scale back stimulus in a significant way next week.
The yield on the 10-year U.S. Treasury note,
with which the index has a robust correlation, also fell to 2.88
percent, pulling away from recent two-year highs of 3.007
percent. The interest rate-sensitive two-year Treasury yield
fell to 0.44 percent, well below recent highs of 0.52
percent with spreads over similar German bonds narrowing.
That helped the euro hold steady above $1.3300. The
bulk of the dollar's losses came against the yen, falling 0.5
percent to 99.435 and leaving the dollar index down at
81.454. Chartists said the move below its 200-day moving average
of 81.714 could prove bearish in the near term.
Analysts said with the threat of an immediate U.S. attack on
Syria waning, the focus was on next week's Federal Reserve
meeting. At the meeting the Fed is expected to kick start its
stimulus withdrawal programme, but given that the U.S. jobs
market is still not picking up pace it may sound a dovish note.
"It looks like the Fed will only make a modest $10 billion
tapering next week. So investors are adjusting their positions
accordingly," said Jane Foley, senior currency analyst at
Rabobank. "The Fed will be very careful with tapering and will
probably only dip its toe."
Since last Friday's disappointing U.S. non-farm payrolls
data, markets have tempered their expectations for any
aggressive moves by the Federal Reserve.
That has led investors to trim long dollar positions built
in recent months on expectations the Fed will start unwinding
stimulus by a much larger amount.
"Right now, it looks to us that investors expect about $10
billion tapering in September, combined with extremely dovish
language, but no change in the timetable for ending QE," said
Steven Englander, Citi's global head of G10 FX Strategy.
A Reuters survey of 69 economists on Monday also showed the
majority expected the Fed to trim its $85 billion monthly
bond-buying programme by $10 billion.
Traders said Asian players were taking profits in the
dollar/yen before holidays. Japan will have two long weekends in
a row while China and Korea will also have holidays next week.
The euro's rally against the yen also cooled off. It fell to
132.34 yen from a 16-week high of 133.375.
Meanwhile, the Australian dollar fell 0.9 percent to $0.9244
, after data showed a surprise drop in Australia's
payrolls and a rise in the jobless rate to a four-year high.