September 16, 2013 / 4:01 PM / 4 years ago

FOREX-Dollar drops after Summers withdraws Fed candidacy

* Dollar hovers near four-week low vs currency basket

* Summers drops from race to be next Fed chief

* Fed’s meeting this qweek still the main FX focus

NEW YORK, Sept 16 (Reuters) - The U.S. dollar hovered near a four-week low against a basket of major currencies on Monday after former Treasury Secretary Lawrence Summers withdrew his name as a candidate to lead the Federal Reserve.

Summers is perceived by markets as relatively hawkish, and his withdrawal suggests there will be a more gradual approach to tightening monetary policy. In addition, his decision could leave Janet Yellen, the Fed’s vice chair, who is known as a policy dove, as the front runner for the top job. President Barack Obama accepted Summers’s withdrawal on Sunday.

“A change in the leadership at the Federal Reserve necessarily generates a degree of uncertainty about the future course of monetary policy,” said Jens Nordvig, global head of currency strategy at Nomura bank in New York. “Of all the various options, Yellen implies the greatest degree of continuity, and hence the least amount of uncertainty.”

The dollar index, which measures the greenback against six major currencies, fell 0.4 percent to 81.126, not far from an intraday trough of 80.968, its lowest level since Aug. 21.

The announcement sparked a rise in risk tolerance, with even emerging market currencies getting a bid against the dollar.

Analysts cautioned the impact could be short-lived and that it would be tough to see the dollar move much lower ahead of the Fed’s two-day policy meeting starting on Tuesday.

Against the yen, the dollar was down 0.5 percent at 98.85 yen, close to the day’s low of 98.53 yen, which was the lowest since Sept. 6, using Reuters data.

The euro was up 0.5 percent at $1.3357, after hitting a near three-week high around $1.3385 earlier. Strategists said the pair could now target the Aug. 20 high.

The South African rand was the best performing of the 36 most actively traded currencies against the dollar, up 1.8 percent against the dollar on Monday.

The dollar has been under pressure on recent disappointing economic data and as markets braced for an expected reduction by the Fed this week of its $85 billion monthly bond-buying stimulus by a modest $10 billion.

“The expectation, and hope, is for a dovish outcome,” said Satoshi Okagawa, senior global markets analyst for Sumitomo Mitsui Banking Corp. in Singapore.

Risky assets could take a hit if the Fed were to taper its stimulus by a larger-than-expected amount, such as $20 billion or more, Okagawa added.

If the Fed does trim by a larger-than-expected $15 billion, the dollar could get an initial knee-jerk boost, but the U.S. central bank might have a firm forward guidance message that could drag the dollar lower, according to Adam Myers, senior FX strategist at Credit Agricole in London.

The Fed will release its policy statement at the close of its meeting on Wednesday.

“Markets haven’t yet focused on the stronger forward guidance language that could accompany the tapering announcement,” said Myers. “For example, reinforcing that the Fed funds rate is not going to go up all through 2014 and perhaps 2015 ... that will be the more dominant factor and pull the dollar lower.”

The dollar has also lost its safe-haven bid since Syrian President Bashar al-Assad agreed to give up his nation’s chemical weapons, averting a U.S. military strike, though the U.S. has not removed that option.

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