June 19, 2013 / 3:46 PM / 4 years ago

FOREX-Dollar slips against key currencies before Fed announcement

* Market awaits signals on Fed's next policy step
    * Fed expected to keep options open on pace of bond buying
    * Dollar hits lowest since February versus major currencies

    By Wanfeng Zhou
    NEW YORK, June 19 (Reuters) - The dollar slipped to a
four-month low against major currencies on Wednesday, ahead of a
Federal Reserve announcement and news conference that could shed
light on the direction of U.S. monetary policy over the next
months.
    Speculation that the Fed might start slowing down its
asset-buying soon had triggered a recent sell-off in global
stocks and sent the safe-haven Japanese yen up more than 5
percent so far this month against the dollar.
    Analysts said Federal Reserve Chairman Ben Bernanke would
likely try to soothe nervous market participants. The Fed will
likely announce that it will continue to buy bonds at a monthly
pace of $85 billion, while keeping options open to scale back
the program later this year if the U.S. labor market improves.
 
    Any indication that the Fed is unlikely to withdraw stimulus
any time soon could hurt the dollar, though the currency could
gain versus the Japanese yen as a rally in equities and other
riskier assets erodes demand for the low-yielding yen.
    "I think the market is a bit ahead of itself on the tapering
story," said Marc Chandler, global head of currency strategy at
Brown Brothers Harriman in New York.
    "It's going to be quiet going into it, then I think it will
turn very volatile in the U.S. afternoon following the Fed
statement and the press conference," he said. "People generally
lack much conviction about the near-term direction and how the
markets respond to the Fed."
    The policy-setting Federal Open Market Committee will
announce its decision at 2:00 p.m. EDT (1800 GMT). Bernanke will
hold a news conference 30 minutes later.
    The dollar index, which measures the greenback against a
basket of currencies, was down 0.1 percent at 80.549,
having hit a four-month low of 80.498.
    The dollar slipped 0.2 percent to 95.15 yen, staying
above the 93.78 yen hit last Thursday, which was its lowest
since April 4. Resistance was cited at 96.13 yen, which is the
23.6 percent Fibonacci retracement of the dollar's fall to 93.78
yen on June 13 from 103.73 yen on May 22.
    The euro rose 0.1 percent to $1.3402, while against
the yen, the euro fell 0.2 percent to 127.41 yen.
    "It will be a difficult task for the Fed," said Ian Gunner,
portfolio manager at Altana Hard Currency Fund. "Tapering is on
the table but at the same time they will try and make it clear
this is a process and very much data-dependent."
    "If the Fed manages to communicate this properly, then we
could see the dollar lose some ground against the more riskier
currencies. We could also see the dollar/yen climb towards 98-99
yen."
    Bernanke is also expected to emphasise that a scaling back
of its stimulus program would not be akin to tightening and that
a rise in the funds rate was a distant prospect. Analysts said
the Fed is likely to downgrade forecasts for growth and possibly
for inflation as well.

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