July 11, 2013 / 8:26 PM / in 4 years

FOREX-Dollar falls on shifting Fed look, but bullish trend intact

* Fed dents hopes of stimulus reduction in coming months
    * Dollar hits 3-week low vs euro, 2-week low vs yen
    * BOJ holds rates, sounds optimistic on economy

    By Wanfeng Zhou
    July 11 (Reuters) - The U.S. dollar fell to multi-week lows
against the euro and yen on Thursday as traders scaled back
expectations that the Federal Reserve will slow its asset
purchases in the coming months.
    Fed Chairman Ben Bernanke said on Wednesday the U.S. central
bank would continue its accommodative monetary policy because of
low inflation and weakness in the labor market. 
    Investors had driven the dollar to three-year peaks against
a basket of currencies this week on bets the Fed will start
reducing its stimulus as early as September. The Fed's $85
billion monthly bond-buying has pressured the dollar because it
is tantamount to printing money.
    "The dramatic drop in the dollar highlights how one-sided
the market had become and how quickly traders raced to close out
long dollar positions," said Camilla Sutton, chief foreign
exchange strategist at Scotiabank in Toronto.
    Minutes of the Fed's June meeting, released Wednesday, also
supported the view of the Fed keeping the status quo for longer,
with many policymakers wanting reassurance the U.S. jobs
recovery was on solid ground before any policy retreat.
 
    The euro rose 0.9 percent to $1.3095, having climbed
to $1.3201, according to Reuters data, its strongest since June
21.
    The euro zone common currency has been under pressure as the
European Central Bank last week clearly indicated it would keep
interest rates low for an "extended period." ECB policymaker
Jens Weidmann, however, said Thursday the central bank could
hike rates if inflationary pressures re-emerged. 
    The dollar lost 0.8 percent to 98.88 yen after
hitting a two-week low of 98.27 yen. Chartists said a weekly
close above 98.75 in dollar/yen would be a signal that the
dollar is retaining its upward bias.         
    The dollar extended losses against the yen after the Bank of
Japan kept its policy on hold and made its most upbeat
assessment in two and a half years. But analysts said the fall
in the pair was likely to be short-lived. 
    The dollar index, which tracks the greenback against
a basket of six currencies, fell 1.6 percent to 82.712. It had
hit 82.418, its lowest since June 25, retreating further from a
three-year high of 84.753 touched on Tuesday.
    In data released on Thursday, U.S. jobless claims showed the
number of Americans filing new claims for unemployment benefits
rose last week, although the level still pointed to healing in
the job market. 
    Separate U.S. data showed prices for imports and exports
fell in June for a fourth straight month, a sign of cooler
economic growth worldwide that could weigh on the American
economy and unnerve policymakers. 
    Despite the sell-off, analysts said the dollar remains
poised to gain further against most major currencies.
    Debates in the United States have focused on the timing of a
reduction of central bank stimulus. In contrast, central banks
in the euro zone, UK and Japan remain biased for further easing.
    Strategists at Citigroup said the dollar's weakness in
response to Bernanke and the Fed minutes may look overdone
relative to the moves in other currencies.
    "We suspect that drivers like market-long dollar positioning
may have played a role," they wrote to clients. "Despite Fed's
cautiousness last night, the U.S. growth story is still the most
compelling in G4. The U.S. cyclical leadership will continue to
support the dollar and U.S. Treasury yields in our view."
    The dollar's moves have been highly correlated to Treasury
yields, which move inversely to price. Treasuries, as well as
stocks, rallied on the perceived dovish comments from Bernanke. 
    Any push back in the timeline of Fed tapering will probably
put downward pressure on yields and the dollar in the near term.
    China supports U.S. plans to end its loose monetary policy
as conditions permit, but urges Washington to weigh the impact
on the global economy of its exit from so-called quantitative
easing, Finance Minister Lou Jiwei said on Thursday on the
sidelines of annual U.S.-China economic talks.

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