* Dollar hits 3-1/2 week lows vs currency basket
* Summers drops from race to be next Fed chief
* Fed Sept 17-18 meeting still main focus
By Masayuki Kitano and Ian Chua
SINGAPORE/SYDNEY, Sept 16 - The U.S. dollar fell to a near four-week low against a basket of major currencies on Monday as investors bet the Federal Reserve will keep monetary policy loose for longer after Lawrence Summers pulled out from the race to be the next Fed chief.
Summers is perceived by markets as relatively hawkish and his decision could leave Janet Yellen, a well known policy dove, as front runner for the top job. President Barrack Obama has accepted Summers’ withdrawal.
The dollar fell 0.4 percent against a basket of major currencies to 81.104. Earlier on Monday, the dollar index touched lows not seen since Aug. 21.
“It had been perceived that if Summers had come into the Fed, he’d have been more likely to remove U.S. policy accommodation quicker,” said Sam Tuck, currency strategist at ANZ in Auckland.
“Now that he’s withdrawn his name there’s speculation that policy accommodation withdrawal will take longer.”
The euro jumped to a 2-1/2 week high around $1.3383, from $1.3300. It was last at $1.3364, up 0.5 percent on the day.
Against the yen, the greenback initially slid to a two-week low of 98.45, falling nearly one yen from late New York on Friday. The dollar later clawed back to 98.88 yen, still down 0.5 percent on the day.
The dollar was already under pressure as markets positioned for the Fed to scale back its massive $85 billion monthly bond-buying stimulus by a modest $10 billion later this week, following the Sept. 17-18 meeting.
“The expectation, and hope, is for a dovish outcome,” said Satoshi Okagawa, senior global markets analyst for Sumitomo Mitsui Banking Corporation in Singapore. Risky assets could take a hit if the Fed were to taper its stimulus by a larger than expected amount, such as by $20 billion or more, Okagawa added.
The dollar also lost ground against commodity currencies such as the Australian and New Zealand dollars.
The Aussie set a three-month high of $0.9370, while the kiwi jumped to $0.8234, reaching highs not seen since mid-May.
The Aussie dollar’s rise stalled near resistance at $0.9374 , its 100-day moving average. After paring some of its gains, the Aussie stood at $0.9333, up 0.9 percent from late U.S. trade on Friday.
The New Zealand dollar was up 0.7 percent on the day at $0.8193.
The news of Summers’ withdrawal broke earlier in the Asian session, when market liquidity was very thin. Japanese markets are closed on Monday for a public holiday.
“It’ll be crucial to see how the market plays out from here. I’d presume we stabilise for a little while,” said Greg Gibbs, senior strategist at RBS in Singapore.
“But I wouldn’t discount the significance of the news, it’d certainly filter through into stronger currencies in the region and we may even see Europe push the dollar down even further.”