* Dollar/yen hits lowest level since early December
* Dollar pares gains after weaker-than-expected new home
* Recent selloff in EM FX supports demand for safe havens
* Euro pops up after German IFO, then slips
By Richard Leong
NEW YORK, Jan 27 The dollar held steady against
the yen and the Swiss franc on Monday, stabilizing against those
safe-haven currencies after losses last week stemming from a
selloff in emerging markets assets picked up pace.
Expectations the U.S. Federal Reserve may further reduce its
bond-purchase stimulus this week halted the decline in the
dollar, which has fallen nearly 2 percent in the past three
The greenback is vulnerable to more losses if more investors
scramble out of emerging markets on concerns about a foreign
exchange crisis in Argentina and the Turkish central bank's
ability to keep interest rates low. The stampede out of emerging
economies has rippled across global markets.
"The market is looking to sell risk ahead of the Fed
meeting," said Michael Woolfolk, senior market strategist at
Bank of New York Mellon in New York.
A rebound in two-year Treasury yields helped the
dollar to 102.39 yen, up 0.1 percent on the day. It had
fallen to 101.77 yen, its lowest since early December, in early
Asian trade when liquidity was thin.
The dollar rose 0.1 percent against the Swiss franc,
bouncing from a one-month low struck on Friday. The euro also
rose 0.2 percent to 1.2254 francs having fallen to a
one-month low of 1.2227 francs on Friday when demand for the yen
and Swiss franc intensified.
"Emerging market currencies remain vulnerable to a selloff
if the Fed continues to taper and that should keep the dollar
supported," said Jane Foley, senior currency strategist at
Rabobank in London.
The dollar retreated from its New York session high versus
the yen and Swiss franc. Weaker-than-expected data on new home
sales in December raised some doubts whether the U.S. economy is
strong enough to grow with less Fed stimulus.
"We had a negative response on the new home sales data,"
The Commerce Department said new home sales fell 7.0 percent
to a seasonally adjusted annual rate of 414,000 units, short of
the 457,000 unit clip forecast by analysts.
"The yen is now the only G10 currency that consistently
trades as a safe haven and as such, should be the natural
beneficiary of ongoing pressure on EM currencies," said Adam
Cole, head of G10 FX strategy at RBC Capital.
Some of the nervousness was reflected in the options market
where one-month implied volatility - a measure of how sharp
swings are likely to be - in dollar/yen rose to its
highest in five weeks. The one-month dollar/yen implied vol rose
to 9.6 percent, having traded at 7.95 percent on Thursday.
Emerging market (EM) currencies from Turkey to Argentina
remained under pressure, making investors nervous that the
shakeout in markets could lead to a full-blown crisis.
In Turkey, a graft investigation is posing one of the
biggest threats to Prime Minister Tayyip Erdogan's 11-year rule,
while Argentina abandoned support of its peso on the open market
last week, sending the currency skidding to its biggest drop
since the 2002 financial crisis.
An underlying concern is that a less accommodative U.S.
monetary policy is encouraging a shift of funds back to the
United States from emerging markets. These markets had enjoyed a
flood of cheap money from the Fed's money printing program,
known as quantitative easing. The flood of dollars had hurt its
value against other currencies before the Fed signaled its
intention to scale back QE last May.
Fed policymakers will meet on Tuesday and Wednesday. They
are expected to reduce the third round of QE by $10 billion to
$65 billion in February.
In addition, tightening credit conditions in China, as the
government seeks to curb growth in high-risk lending, heightened
fears about a possible slowdown.
The euro slipped against the dollar to $1.3678,
having risen to an European session high of $1.3716 after German
IFO numbers. German business morale climbed in January to its
highest level since July 2011, suggesting Europe's largest
economy is on track for a strong start to 2014..